GMR Airports Limited (ADP) Earnings Call Transcript & Summary

Welcome to the group ADP announcement. The conference is now open, and I leave the floor to Cécile Combeau, Head of Investor Relations.

Thank you, and good morning, everyone. Thank you very much for joining us on such short notice. Chairman and CEO, Augustin de Romanet; and CFO, Philippe Pascal, are here with me to comment the announcement we made yesterday evening. We will then open the line for Q&A. [Operator Instructions] With that, I would like to draw your attention to our usual disclaimer related to forward-looking statements, which is on Page 15 of our presentation. And now let me hand it over to our Chairman and CEO, Augustin de Romanet

Thank you, Cécile, and good morning, everyone. It's a pleasure to be with you all today early in this morning. As you saw in our disclosures yesterday night, we are initiating a new and very important step in our presence in India. 3 years after our acquisition of a stake in the Indian group GMR Airport or as we call GAL, we are accelerating our initial plans to have a listed assets. This is why we are initiating today process, aiming at a merger by the first half of 2024, between GAL and GMR airport infrastructure, which we call GIL. GIL, our partner holding 51% of the capital of GAL is listed on the Indian stock exchanges, both Delhi and Mumbai. GAL, which we own at 49% since 2020 own major airport assets as reminded in this slide and act as a platform for the development for group ADP in South and Southeast Asia. This region shows a very dynamic air traffic recovery and the strong need of airport infrastructure development. In the post Covid world, we see a good window of opportunity for future profitable growth there. You are aware that the Indian government has announced service of privatizations, for instance. So together with our partner, we want to be in the best possible position to seize these opportunities. As you can see on this slide, Slide 3, this merger operation has been built to achieve one main benefits. The first one is to simplify and clarify the capital structure, and it allows investors to access to the company, which is holding directly the airport assets. This would have been a sufficient reason to do the deal. But we have other interest to do the deal. The first one is that it's fully revealed the value of GAL through a direct listing. And it provides liquidity to the stake held by ADP. Also, it creates an agile platform to capture new development opportunities in India and in South Asia. The framework agreement we have signed initiates a process leading to the merger of GIL and GAL by the first half of 2024. This agreement provides 2 strategic characteristics. The first one is that group ADP will hold strong economic interest in the new merged entity called New GIL, maintaining our exposure to future profitable growth in this region. The second one is that thanks to a shareholder agreemen, Group ADP will be entitled to extended rights in New GIL's governments, similar, I insist, similar to do [indiscernible] in GAL, hence, preserving its significant influence and ability to pursue the ambition to create value for our stakeholders. I now leave the floor to Philippe Pascal, who will go through the details of this operation.

Thank you, Augustin, and good morning, everyone. Let's move on to Slide 4, which shows the currently shareholding structure of GMR Airport. The contemplating merger will be between GAL in which we are shareholders and GIL, our partner listed on the Indian stock market. GIL is currently the controlling shareholders of GAL and ADP currently owns 49% of GAL. Upon merger, Group ADP will therefore become the shareholder of New GIL, a listed company sharing ownership with GMR Group and public investors. Remember that until 2021, deal used to be a conglomerate. Since beginning of 2022, the non-airport asset previously held by GIL has been demerged into another company called GPUIL, GMR Power and Urban Infra Limited. As a result of this demerger transaction, the assets of GIL are now only og airport activities. The framework agreement announced today includes different tools, reflecting our strategic approach for this participation and our partnership with GMR Group. First, strengthening the balance sheet of deal. That is a huge targets. As of today, GIL continued to carry some regular contingent liabilities, which are non-airport related. According to our agreement, and this is a commission precedent to the merger. This residual contingent liabilities will be reduced to a minimum level and group ADP will become shareholder of the listed entity with no exposure to such liabilities. To accelerate this step, group ADP will subscribes to foreign convertible currency bonds, FCCB, issued by GAL for an amount of EUR 331 million. This loan will be used by GIL to clear its balance sheet. We have implemented the appropriate mechanism to fully secure the repayment of this loan. Remember that FCCB, our loan, not a new equity injection. We get our money back, and we have a strong remuneration for that. The second point is to maintain a substantial level of economic interest in New GIL. Based on independent valuation exercise and supported by fairness opinions, ADP would hold 45.7% economic interest upon merger. This calculation takes into account a liquidity premium to give it's shareholders and includes the early settlement of the ratchet agreement happen in 2020, it's a global offer. Third point, we want to keep our multi-local approach to international development and preserve the local nature of GMR Airport. To do so, GMR Group will remain the controlling shareholder of new deals. And for that purpose, we will segregate our shareholding into 2 categories of instruments. First, the ordinary equity shares and second, the optionally convertible redeemable preference shares or called OCRPS. OCRPS is an equity instrument, and we have a right of dividends. This will allow group ADP to maintain its economic exposure as just stated, while positioning our partner, GMR Group, as a controlling shareholder at largest holder of ordinary share. We maintain with that specific tools are multi-local approach. Last, but certainly not the least, we will retain the extended government site. We are currently entitled to by adjusting the current shareholder agreement with GIL to become an agreement with GMR enterprise. ADP will maintain its significant influence as Augustin say just before. Moving on to Slide 6. We illustrate the contemplating shareholding structure and our economic interest in the New GIL, which will be listed on the Indian stock exchanges. On the left, you see the shareholding structure in terms of ordinary shares. You see that GIL Enterprise, GMR Group, will remain the component shareholder in the New GIL. On the right of the slide, we take into account the OCRPS because we are entitled to dividends. As you can see, Group ADP will maintain a significant exposure to growth with a 45.7% economic interest in the new game compared to our current 49% in GAL. In spite of the change in our economic interest, the underlying value for ADP is actually equivalent or even higher. Why is it equivalent and what is a good deal for it? Because our stake in the New GIL will be a liquid one. We will become a shareholder of a more agile company with a balance sheet able to size growth opportunity in Southeast Asia. And last, we see virtue in having a listed company because it provides transparency and the company financial and its governance. Let's move to Slide 7 with the expected financial impact of the operation. Looking first at what happened before the merger. On subscription, meaning in the coming days, the FCCB will be accounting at fair value as financial assets in group ADP balance sheet. Their subscription will lead to a cash expense of EUR 331 million in the coming weeks. The earn-outs being already provided for the settlement with in neutral in the P&L. We will have a cash expenses of EUR 62 million to be paid by installments before the merger. Second point, looking at what happened at merger completion in 2024. We will record a P&L charge. This is no cash refencing the change in ADP's economic interest, including the ratchet settlement and the liquidity premium. This impact will be determined at major but it is currently estimated at around EUR 100 million. Overall, this operation is fully in line with the group strategy of selective international growth by facilitating the future development of GMR Airport. We confirm both our net debt EBITDA target of 3.5 to 4.5x EBITDA in 2025. And our dividend policy, the 60% payout ratio and a minimum of EUR 3 per share for the 2023, 2025 period. On Slide 8, we can see an indicative timeline of the process. The merger team will go through several regulatory both creditors and shareholders approval and is expected to be complemented during the first half of 2024. I will now give back the floor to Augustin on the outlook. This operation will open for our assets. Thank you.

Thank you very much, Philippe. So I will be very short to conclude, but I would like now to give you a few comments on the general outlook of our Indian investment on Slide 9. Everybody knows that India's population is growing fast and especially it's middle class. This will translate in a sharp increase in air travel, which will be possible, thanks to the development of the appropriate Infra. You can already see Indian Airlines preparing for this growth with very large aircraft orders. We want to be ready, and we are convinced that the New GIL deleveraged, agile, pure player company listed on the Indian stock market will be in prime position and in better position to size these additional development opportunities in the privatizations to come in India and in Southeast Asia. Next slide shows you that our development strategy is built on a unique network and unique model, consisting in Group ADP itself listed in Paris and 2 regional seats, 2 regional development platforms. The first one, historically speaking, is TAV Airport, which is listed in Turkey and operating in the Middle East and Africa. The second one is GMR, which will become transparent, easier to follow on a more agile platform in India and Southeast Asia upon the merger initiated today. The development of these 2 fleets will support the growth, the profitable growth of the group's international footprint. We expect international activities, including GMR, to contribute to up to half of our operating income by EUR 235 so in 10 years only. As a global a multilocal player, we will just pursue our ambition to create value for all stakeholders, putting decarbonization as a common objective in all our airport platforms. And with that, Philippe and myself will be happy to answer to your questions. Mr. Operator would you please...

[Operator Instructions] We'll now take our first question from Cristian Nedelcu at UBS.

Maybe the first question, post the merger, could you tell us how does the balance sheet of GIL look like? I think today, the entity has around EUR 2.5 billion of net debt and around EUR 300 million of EBITDA. So it's a high single-digit net debt-to-EBITDA. So how does this look after the merger? And secondly, just a technical point. I think if I understand well, the public shareholders move from 20% ownership in GAL to 34% capital and 27.3% economic interest. So could you explain exactly what happens here? Do they contribute? Is there an equity issue to associated here? And if I understand well, some of the shares will not pay a dividend because the 34% capital is higher than the economic interest.

Thank you for your question. I'll start by the second question. You can see Slide 6 in our presentation, the above illustration and shareholding structure, first in the left and the economic interest in the New GIL in the right. So in fact, in India, we made a minimum of 25% in the public for elite company. When you see the contemplated shareholder structure, we can see that in project listed company Public on 34% at the end of the day and 33.7% for GMR Group and 32.3% for it's globally a good balance. But in fact, in the economic interest, when we will take account the OCRPS that is a specific shares, we have some economic interest in the global result of the New GIL, and we have to have our 32.3%, that is in the listed company, plus the dividend named by our specific OCRPS, that is for around 19.7% in a fully diluted basis. So globally, in interest, were 45.7%. For the public, we can see that public in the economic interest of around 27.3%. We have some footnote in this slide, but it's very important to understand the perimeter to calculate the percentage of each share because, obviously, in the shareholding structure for -- just for the listed company, we don't calculate in the same manner that in the economic interest with the full impact. For your second question -- your first question about liability. So there is currently a legacy of some loans and warranty and yield balance sheets, which are related to its sister company that is GPUIL, the non-airport business after the demerger at the beginning of 2022. So the FCCB subscribed by ADP will allow to accelerate the settlement of both non-airport liabilities, but we have still some liabilities in -- after all the clean effect. But it's very globally small for less than EUR 130 million. And -- but for these liabilities, we have a specific guarantee, but also in the swap ratio, we take account these liabilities when we merge the company to establish, to fix our shares. So thank you for you for this first question. question.

We'll now move on to our next question from Dario Maglione at BNP Paribas.

Two questions from me. First one, what is the size of the contingent liabilities at the moment before the measure? And the second question, regarding the 45.7% economic interest...

The line got disconnected from his side and one moment please. There no further question in queue right now while we wait for him to come back. [Operator Instructions] We've got Cristian Nedelcu once again.

I think maybe just on the voting rights, I think your voting right goes to 32%. Does this mean that your influencing GMR decision decreases in any way? I know your economic interest remains 45.7%, but your voting rates go down to 32%, if I understand well.

Thank you for this question. So for your second question, we prepare all our shareholder agreement. And so we present our significant exposure despite, in fact, we -- in terms of voting rights, we have a decrease. But our shareholder agreement is very strong and all our rights vectorize and so on. These matter all is preserved. So we have the same shareholder agreement on the same right compared to the current structure in GAL.

And if I may add, Augustin de Beaune. If we didn't do this merger, the process lead us to an usual IPO. And in this usual IPO, we should have lost all our governance rights. Anyway, we should have renegotiated our governance rights. It means that with this operation, first one, we maintain our governance rights without any change since the agreement of 2020, plus we create a listed company, which allows us to rebuild the value and to clean all the liabilities.

For your first question about content and liabilities before the merger. We have 3 kinds of liabilities. First, it's around EUR 250 million liabilities cash and EUR 250 million, noncash liabilities. And the third is FCCB of co-rate investment authorities, but it's GMR after close. So thank you for your question.

Thank you. We'll now once again take our next question from Dario at BNP Paribas.

Hello. Can you hear me now.

Yes. Perfect.

Great. Yes. So the second question that I had was around 45.7% economic interest. I just wanted to understand, so you will get the percentage, the 45% of the dividend. In case the convertible bond is converted or even if it's not converted?

No. We preserved our dividend in before and after the conversion.

Okay. So regardless of whether the bond is converted or not?

Yes.

Okay. And maybe a follow-up on what you mentioned about the residual contingent liabilities. You mentioned EUR 250 million cash, EUR 250 million noncash. And then a convertible bond for the investment authority, how much is that for?

How much is that?

How much -- what is the size? What is the value that you are kind of replacing?

For the Convertible investment FCCB it's around $300 million.

Thank you. We'll now move on to our next question from Nicolas Mora at Morgan Stanley.

So a couple of questions for me as well. Just on the converted on bond and the OCRPS plus and shares -- what is the maturity of each of the instruments. And at the end of the day, do you actually intend to convert or you are just not going to convert except in very special cases? That's the first question. Number two. And jumping on the question on the balance sheet of GIL and potentially the new deal, which seems quite leveraged. I mean you talk about opportunities to grow. How can you square the debate and how can you grow with such high leverage in the short, medium term?

So thank you for your question. Also in the first question. So the maturity of FCCB, it's a 10-year maturity. But we have some room of Hanover and Jean, if it's possible, and we are also confident about that content before it repaid or converted before the termination of 10 years. For the OCRPS the maturity due to the fact that it's a specific surplus before the listing of the company, we have a maturity of 20 years. So -- and at the end of the day, we can manage the conversion, and we can convert, ADP can convert at the end of 20 years, automatically without a special element. In the balance sheet and our capacity to deleverage the company to our companies the growth in the Indian airport market. As you know, we are in a very dynamic region. And obviously, we have to accompany the growth of Indian market for CapEx, but also to try to be able to catch some opportunities. And for that, we have to deleverage the company. That is possible, first, to reduce our debt through the combination of minority stake monetization. The good example is the Cebu operation that we are sold this asset. And we have also the second pillar that is the cash flow inflow increased with activities with lighter capital needs, services, retails and duty free. By becoming a listed company, GMR Airport will be a broader financial option, greater transparency will notably provide a possible access to a wider range of fine bonds. It is not the case for the moment and for private company. But at the end of the day, we believe that will be -- with this new deal company with a very simple structure, more agile, we can decrease the cost of at and we can also be more agile if we have a good opportunity in the future.

[Operator Instructions] we'll now move on to our next question from Graham Hunt at Jefferies.

Just one from me, actually. The governance rights that you spoke about that have been extended with this new shareholder agreement. Could you just provide any color on anything specific that you were focused on retaining versus your current rights that you hold?

So as Augustin said, we preserve all our shareholder agreements. So ADP in the position of significant influence with the government side allowing in particular to have say on investment decision. ADP in solid position and can block some initiative, which will be unreasonable according to ADP's criteria. The shareholders' agreement with GMR provide for equal number of seats at the Board for ADP and for GM. And in addition, ADP with all several positions within the executive management of the New GIL. So we can [indiscernible] We have government sites. We have board member. We have executive management and at the end of the day, we have also a strong confidence in GMR management.

Yes. To be precise, we didn't say in our previous answer that we extend our governance rights. We did say that we maintain our governance right, and it was important because in the process happening with the usual IPO in 1 or 2 years, we should have renegotiated all the government's rights. And with this operation, which is an anticipation, we obtained from our partner, GMR, to keep our government rights for all the future, it means with no issuance, which is very important because it's a better position than if we had to renegotiate.

Thank you. We'll move on to our next question from José Arroyas at Santander.

Just one question, please. I have a question on the foreign currency converting bond. In the press release, there is a [indiscernible] program. I think it's the third from the left that says that or suggests to me that this point can be converted into an additional economic stake of between 5% and 8%. Can you confirm if I'm right to interpret this way? And if so, how does this mechanism work? And what cost would it represent for ADP.

So thank you for this question. So perhaps just before to answer directly to the question. We have to be -- to have in mind the FCCB approach. First, at the end of the day, we have 4 solutions. First, ADP get reimbursed. The second point is we can convert stint shares and sell the shares. The third solution is -- we have a put to GMR enterprise and they reimburse us. And the fourth solution is to wait for maturity and convert them into shares at the end of the day. So in fact, if GMR wants, it's possible for GMR to buy back and to convert. And so in this case, our share to 45.7 million to 33.5 million. If we go to the maturity, and we convert and ADP converts the share, we can have -- we can increase mechanically our share.

We'll take our last question from Cristian at UBS once again.

Just one, is there any protection against future dilution if the new entity decides to issue equity to pursue growth or anything like that? Is there any protection there for your current ownership? Or will you decide at that stage if you want to participate or not and finance that growth for the new entity?

So in any case, we are better right. So we can stop if it's a deal is not in favor ADP. We have a strong shareholder agreement, first point. And the second point, remember that we can convert our OCRPS as in any case.

We'll take our next question from Nicolas at Morgan Stanley, once again.

Just giving [indiscernible] can you -- could you share with us the base valuation of GAL you've been setting this agreement upon.

No, not at all.

[Operator Instructions] There are no further questions in queue. I will now hand it back to your host for closing remarks. Thank you.

Well, it's time to close this presentation. Thank you, everyone, for having locked on to our conference. And we are looking forward to seeing you in the coming days and weeks, and please don't hesitate to get in touch with me or Elliot, in the Investor Relations team. And with that, good day, everyone.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Stay safe. You may now disconnect.