Media Release 17 December Auckland Airport directors recommend shareholders reject CPPIB bid

Transcription

1 Media Release 17 December 2007 Auckland Airport directors recommend shareholders reject CPPIB bid The board of Auckland Airport is advising its shareholders to reject the partial takeover offer from the Canada Pension Plan Investment Board (CPPIB) for $ per share. The offer is for 39.53% of the Auckland Airport shares not already held by CPPIB. Chairman of the board, Tony Frankham, said that directors unanimously recommended that shareholders vote to object to CPPIB getting 40% of the company and to hold onto their Auckland Airport shares. "We do not believe the offer fully reflects the value of Auckland Airport. Nor do we believe that the introduction of CPPIB as a cornerstone shareholder would assist the company in any material manner. While the takeover offer has some attractive aspects, on balance, the partial nature of the offer gives shareholders no certainty on the total value they will receive from the takeover. he said Mr Frankham said the board is optimistic about the value of Auckland Airport, particularly the way in which it is positioned to benefit from growth in aviation in this part of the world.

2 - 2 - We have commissioned a report, sent to shareholders with the Target Company Statement, which demonstrates the potential growth in the Australasian aviation sector. The board expects Auckland Airport to benefit from that growth. As we have previously indicated, we see benefit in establishing a synergistic relationship with a partner who would bring additional airport expertise or tourism opportunities to complement our existing excellent management team. We anticipate this partner would have global connections and relationships to further enhance the business of Auckland Airport. he said "While CPPIB would be a committed investor, the board is concerned that they bring little in the way of direct airport experience and, as a passive investment fund, have limited scope to directly contribute to Auckland Airport's growth strategy beyond its current business plan. The board has serious doubts about whether the amalgamation proposal outlined by the Canadians can succeed, and was previously concerned by the high debt levels of that proposal. Mr Frankham said that while the board recognised that shareholders had different investment objectives, he urged them not to accept a near term gain that may close the door on achieving a restructuring. "By accepting this partial offer shareholders will have lost any future opportunity to benefit from the introduction of an industry partner. An independent adviser report provided by Grant Samuel concluded that the price being offered by CPPIB is above its valuation range of $ $3.48 per share.

3 - 3 - "While we respect the work carried out by Grant Samuel, the board considers that there are more growth opportunities and value upside in this strategic asset. If the offer succeeds, acceptances will most likely be scaled. As a result the overall value of accepting the offer will be less than $ per share. The directors therefore believe that, on balance, the partial CPPIB offer is not in the best interests of shareholders when considered on a long term basis. However, if it turns out that most Auckland Airport shareholders do want to sell to CPPIB, and the takeover becomes inevitable, then directors will let all shareholders know so that they can decide to sell some shares too," said Frankham. A copy of the Target Company Statement is being sent to shareholders this week. It is important for shareholders to review this information carefully and consult with their own financial advisers before making any final decision. Mr Frankham said that following the failure of this takeover offer, the board will commence a process seeking to identify a cornerstone investor with the attributes to deliver value for all Auckland Airport shareholders. - ends A copy of the Target Company Statement is attached. For further information, please contact: Lucy Powell Head of communications Tel +64 (0) Tel: +64 (0)

4 It s your Airport Target Company Statement Prepared in accordance with Rule 46 of the Takeovers Code in relation to a partial takeover offer by NZ Airport NC Limited, a subsidiary of Canada Pension Plan Investment Board

5 Let s Auckland International Airport Limited Target Company Statement 1 keep it that way! OBJECT to CPPIB making the Offer and owning 40% of Auckland Airport; and HOLD your shares. If you have any queries you should contact your financial or other professional adviser, or call Computershare on

6 Contents Section 1 Chairman s Letter Section 2 Why you should reject the Offer Section 3 Frequently asked questions Section 4 Statutory information Section 5 Independent Adviser s Report Section 6 Tourism Futures International Limited/ Airbiz Aviation Strategies Limited Report If you have any queries you should contact your financial or other professional adviser, or call Computershare on

7 2 Auckland International Airport Limited Target Company Statement Section 1: Chairman s Letter

8 3 PO Box , Auckland Airport Manukau 2150, New Zealand T: F: W: auckland-airport.co.nz E: corporate@akl-airport.co.nz 17 December 2007 Dear Shareholder, Vote against cppib s offer and hold your shares Introduction and background On 16 November 2007, Auckland International Airport Limited ( Auckland Airport or the Company ) received a notice from NZ Airport NC Limited, a subsidiary of the Canada Pension Plan Investment Board ( CPPIB ) in relation to a takeover offer (the Offer ) for 39.2% of the shares in Auckland Airport at a price of $ per share. CPPIB delivered the Offer to Auckland Airport on 14 December If successful, the Offer would take CPPIB s ownership to 40% of Auckland Airport. CPPIB has also indicated that, if the Offer is successful, it will take all reasonable steps within its control to ensure a financial restructuring of Auckland Airport, by way of an arrangement known as an amalgamation, is presented to shareholders. The amalgamation proposal is a separate transaction that may or may not subsequently be placed before shareholders. The notice from CPPIB was received after the Directors of Auckland Airport announced on 31 October 2007 that they had terminated discussions with CPPIB in relation to a restructuring of the Company by way of an amalgamation. Options You should now have received the formal documents from CPPIB relating to the takeover offer. As a shareholder in Auckland Airport, you have the opportunity to: Object to or approve CPPIB making the Offer and owning 40% of Auckland Airport; and Reject or accept the Offer to sell some or all of your shares to CPPIB. Recommendation of Directors For the reasons discussed in more detail below and in Section 2 of this Target Company Statement, your Directors unanimously recommend that you: OBJECT to CPPIB making the Offer and owning 40% of Auckland Airport; and HOLD your shares. Directors will update shareholders on the progress of voting to object to or approve CPPIB making the Offer and owning 40% of Auckland Airport and the level of acceptances. If it becomes apparent on or before 6 March 2008 that the Offer is likely to succeed contrary to the recommendation of Directors, the Directors may then recommend to shareholders that they accept the Offer to sell some or all of their shares. This will mean that shareholders wishing to, will benefit from the Offer price for those shares they sell under the Offer. Approach to considering the Offer Following receipt of the takeover notice from CPPIB, the Directors commissioned Grant Samuel & Associates Limited (the Independent Adviser ) to provide an Independent Adviser s report and sought advice from the Company s financial advisers, First NZ Capital Limited and Credit Suisse (Australia) Limited, and its legal advisers, Russell McVeagh. The Directors also commissioned Tourism Futures International Limited ( TFI ) and Airbiz Aviation Strategies Limited ( Airbiz ) to provide a report on the passenger and aircraft demand environment for Auckland Airport. The Directors are committed to providing detailed information to allow shareholders to formulate their own views on the Offer. Reports from the Independent Adviser and TFI and Airbiz are included in this Target Company Statement, along with all other information required under the Takeovers Code. Assessment of the Offer The partial nature of the Offer and the possibility of a subsequent amalgamation mean that the ultimate outcomes for shareholders are complex and uncertain. The merits of the Offer for each shareholder will depend on their individual circumstances and investment objectives. In this regard, the Directors have identified a range of both positive and negative aspects of the Offer.

9 4 Auckland International Airport Limited Target Company Statement Positive aspects of the Offer The Offer price is above the valuation range assessed by the Independent Adviser. If successful, the Offer will allow shareholders to sell some or all of their shares at the highest price achievable to date. This price is materially above the current share price and the prevailing share price before the start of takeover speculation about Auckland Airport. The partial nature of the Offer means that Auckland Airport will remain listed on the New Zealand and Australian stock exchanges allowing shareholders to maintain an investment in the Company. Shareholders may be able to sell some shares in the Offer and subsequently buy shares in the market, possibly at a lower price, after the Offer is completed. It is noted, however, that effective control of the Company will have passed at that stage. If the Offer is not accepted, the share price will be likely to trade below the Offer price and the valuation range of the Independent Adviser. The Company s business is subject to a number of variables, such as passenger growth below forecasts, one-off global shocks or adverse changes to the regulatory environment, which may impact the Company s future value and share price. If the Offer is not accepted, other parties may acquire a significant minority shareholding which may prevent a control transaction from occurring in the future. At this time, there are no other takeover offers or proposals for shareholders to consider. Further details in relation to the positive aspects of the Offer are set out in the Independent Adviser s report, which is included in Section 5 of this Target Company Statement. Negative aspects of the Offer The Offer is for only 39.2% of the shares in Auckland Airport. If more than 39.2% of the Company s shares are offered for sale, then scaling will occur. This means that you are unlikely to be able to sell all of your shares at $ The value for your shares will therefore depend on the number of shares you sell, the number of shares sold by other shareholders and the market price of your remaining shares following the Offer. The value for all of your shares may therefore be somewhat less than the Offer price of $ per share. If CPPIB is successful in acquiring 40% of Auckland Airport, the prospects of another takeover offer or control transaction for Auckland Airport occurring will be significantly reduced. This means that shareholders may not benefit from a control premium for their remaining shares. Completion of the subsequent amalgamation proposal is very uncertain. If the Offer is successful, the ability to complete a value enhancing restructuring of the Company may be lost forever. The valuation range assessed by the Independent Adviser is highly sensitive to key assumptions. The Offer price may not fully reflect the future prospects and long-term value of Auckland Airport. Should Auckland Airport become substantially owned by a single foreign party (such as CPPIB) and that party becomes influential over the Company, its strategy and future direction, then New Zealand public opinion and political sentiment may be negatively affected and this may adversely affect the Company s brand, corporate reputation and standing in the wider community. Completion of the Offer will almost certainly remove the prospect of introducing a cornerstone shareholder that can bring additional airport expertise or tourism opportunities to grow the business for the benefit of all shareholders. Further details in relation to the negative aspects of the Offer are set out in Section 2 of this Target Company Statement and the Independent Adviser s report which is included in Section 5 of this Target Company Statement. Divergent nature of shareholder interests Auckland Airport has several identifiable shareholder groups. These include the Auckland and Manukau City Councils, domestic institutions, international institutions and retail investors. Understandably, these shareholder groups have different investment objectives and tax circumstances. Furthermore, this Offer is a partial takeover offer for only 39.2% of the Company s shares and there is also the possibility of a subsequent amalgamation which may be preferred by some shareholders, but not others.

10 Auckland International Airport Limited Target Company Statement 5 These circumstances highlight the divergent nature of shareholder interests in this case. Having regard to these divergent interests, it is difficult for Directors to make a single recommendation that meets the interests of each and every shareholder. The Directors have provided information to enable shareholders to assess the Offer, to take advice and to form their own views. Recommendation of Directors Despite the divergent nature of shareholder interests noted above, the Directors have formed an overall recommendation. In reaching this view, the Directors have carefully considered the positive and negative aspects of the Offer and have fully considered the expert advice available to them. They have exercised their own commercial judgement. Giving the weight they consider appropriate to the various factors, the Directors are of the view that, on balance, the Offer is not in the best interests of shareholders when considered on a long-term basis. Accordingly, the Directors unanimously recommend that you: OBJECT to CPPIB making the Offer and owning 40% of Auckland Airport; and HOLD your shares. Actions you should take Tick OBJECT to CPPIB making the Offer and owning 40% of Auckland Airport on the Approval Form included in the documents received from CPPIB and return the form in the reply paid envelope. Hold your shares. Do NOT complete the Blue Acceptance Form, Green Acceptance Form or Withdrawal Notice enclosed in the documents from CPPIB. Directors will update shareholders on the progress of voting to object to or approve CPPIB making the Offer and owning 40% of Auckland Airport and the level of acceptances. If it becomes apparent on or before 6 March 2008 that the Offer is likely to succeed contrary to the recommendation of Directors, the Directors may then recommend to shareholders that they accept the Offer to sell some or all of their shares. This will mean that shareholders wishing to, will benefit from the Offer price for those shares they sell under the Offer. The Directors who own shares also advise shareholders that they will each vote against CPPIB owning 40% of Auckland Airport and will hold their shares in which they have a relevant interest. However, Directors who own shares may, if the Offer is likely to succeed, consider selling some or all of their shares into the Offer. The Directors recommend you consider the information in this Target Company Statement carefully. The Directors also encourage you to seek advice from an independent financial or legal adviser in respect of the Offer, and consider that advice in light of your own circumstances. Having considered this material, shareholders who wish to accept the Offer should follow the instructions outlined in the Offer. Shareholders who do not wish to accept the Offer should ensure they take no step to accept it, but complete the Approval Form by ticking OBJECT to CPPIB making the Offer and owning 40% of Auckland Airport. Yours faithfully Anthony N Frankham Chairman Auckland International Airport Limited

11 6 Auckland International Airport Limited Target Company Statement Section 2: Why you should reject the Offer

12 Auckland International Airport Limited Target Company Statement 7 As set out in the Chairman s Letter in Section 1 of this Target Company Statement, the Directors unanimously recommend that you: OBJECT to CPPIB making the Offer and owning 40% of Auckland Airport; and HOLD your shares. This recommendation is based on the Directors overall view of the Offer when considering the best interests of shareholders over the long term. In reaching their conclusions in relation to the Offer, the Directors have taken into account detailed expert advice and a wide range of issues, both in favour of and against the Offer. The detailed reasons for the conclusion reached by Directors are set out below. 1. There is uncertainty about the number of shares you may sell The Offer is a partial takeover offer for only 39.2% of the shares in Auckland Airport (or 39.53% of the shares in Auckland Airport that CPPIB does not already own). If successful, this will take CPPIB s holding to 40% of Auckland Airport. If there are more than 39.2% of the shares offered for sale, then scaling will occur. In this case, you will not be able to sell all of your shares at $ The Independent Adviser notes on page 13 of its report that: As the CPP Offer is a partial offer there is no certainty what proportion of each accepting shareholder s shares in [Auckland Airport] will be bought if the Offer is successful. If the Offer is successful and assuming that neither [Auckland City Council] nor [Manukau City Council] accept the Offer in respect of their shares, accepting shareholders could end up selling between 51% and 100% of the shares they accept into the Offer. Given that excess acceptances will be scaled down, it is almost certain that if the offer is successful that accepting shareholders will not be able to sell all their shares into the Offer. This lack of clarity is problematic for communications with shareholders but is in line with the rules of the Takeovers Code. If the Offer is unsuccessful in achieving at least 40%, no shares will be bought from accepting shareholders. The Directors consider that the uncertainty in relation to the number of shares that shareholders may be able to sell is unsatisfactory. Directors requested CPPIB to consider extending the Offer to up to 100% of the shares in Auckland Airport, with a minimum acceptance condition of 50.1%, in order to provide a certain cash price for all shares on issue for shareholders to consider. However, this request was not accepted by CPPIB. Key Point Shareholders are unlikely to be able to sell all of their shares at $ per share. 2. There is uncertainty about the overall value of your shares under this Offer The Offer price of $ per share is above the top end of the Independent Adviser s valuation range of $ $3.48. However, as noted under point 1 above, it is most unlikely that you will be able to sell all of your shares at this Offer price. This is because the Offer is limited to 39.2% of the total shares in Auckland Airport. As a result, 60% of the Auckland Airport shares on issue will not be able to take advantage of this Offer. Accordingly, the overall value for your shares will depend on the number of shares that you decide to sell, the number of shares sold by other shareholders and the value of your remaining shares in the market following completion of the Offer. On completion of the Offer, the overall value for your shares could well be materially lower than the Offer price of $ per share. The table below sets out the value per share depending on a range of possible outcomes. Post Offer Trading Price of Auckland Airport Shares 1 $2.40 $2.50 $2.60 $2.70 $2.80 $2.90 $3.00 All shares accept $2.90 $2.96 $3.02 $3.08 $3.14 $3.20 $3.26 Councils do not accept All other shares accept $3.04 $3.09 $3.14 $3.19 $3.24 $3.29 $3.34 Acceptances for 70% of shares $3.10 $3.15 $3.19 $3.24 $3.28 $3.32 $3.37 Acceptances for 60% of shares $3.22 $3.26 $3.29 $3.32 $3.36 $3.39 $3.43 Acceptances for 50% of shares $3.38 $3.41 $3.43 $3.45 $3.47 $3.49 $3.51 Acceptances for 39.2% of shares $ $ $ $ $ $ $ Directors do not make any prediction about the future share price of Auckland Airport. For example, if you own 1,000 shares in Auckland Airport that you decide to sell, there are acceptances received for 60% of the shares in Auckland Airport and the share price after the Offer is $2.70, the overall value for all of your shares under this Offer will be $3.32 per share, or $3,320 in total for 1,000 shares. The Directors note that the range of value outcomes in the table above is mostly in the middle of the Independent Adviser s valuation range, and in some cases are at the bottom end of this valuation range. The Directors consider that the uncertainty in relation to the value achieved under this Offer is unsatisfactory. Key Points The Offer price of $ proposed by CPPIB does not necessarily reflect the overall value of all of your shares under this Offer. The overall value of your shares under this Offer may be somewhat less than $ In assessing the merits of the Offer, shareholders should consider the range of possible value outcomes, not the face value of the Offer of $ per share. The range of value outcomes is mostly in the middle of the valuation range of the Independent Adviser s report, and in some cases are at the bottom end of this valuation range. 3. The prospects of another control transaction for Auckland Airport will be lost and shareholders may not fully benefit from the control premium If the Offer is successful, CPPIB will own 40% of Auckland Airport. The next largest shareholders are expected to be Auckland City Council with 12.74% and Manukau City Council with 10.04%. The remaining shareholdings are widely spread across a range of institutional and retail investors. As such, if the Offer is successful, there will be little or no prospect of another takeover offer or control transaction for Auckland Airport, unless CPPIB decides to sell at some stage in the future. This is highly unlikely given that CPPIB has very clearly stated long-term investment objectives.

13 8 Auckland International Airport Limited Target Company Statement The Independent Adviser notes at page 15 of its report that: If the CPP Offer is successful it will have significant influence over but will not control the company. While CPP has stated long term investment objectives, its existence as a cornerstone controlling shareholder will materially diminish the attraction of [Auckland Airport] as a takeover target. If CPP is true to its investment objectives and remains a long term cornerstone investor, no takeover offer is likely to be successful for [Auckland Airport] for the foreseeable future. Furthermore, as noted above, under this Offer it is most unlikely that shareholders will be able to sell all of their shares at the Offer price. As such, shareholders will not be able to achieve a control premium for all of their shares. Effective control of Auckland Airport will have passed, but shareholders will not fully benefit from that control premium. Accordingly, shareholders must carefully consider whether the merits of this particular Offer outweigh the possibility of obtaining a better takeover offer or control transaction in the future. With the control premium gone, the Directors would not expect Auckland Airport shares to trade as highly as would be the case if the control premium is preserved. Shareholders will also need to consider whether retaining shares in Auckland Airport is likely to achieve a superior outcome in the long term compared with selling into this Offer at this time. For the reasons set out in this Target Company Statement, the Directors believe that this Offer is unsatisfactory in a number of important respects. This includes the partial nature of the Offer in particular and also the Offer price, given the partial nature of the Offer. In addition, passage of control leads to: a concentration of voting interests, which means that shareholders will not have the same influence on shareholder votes as they do today; and reduced share market liquidity, with the free-float of Auckland Airport reducing from 77% to 37% of the shares of the Company, which means that shareholders may have reduced ability to buy and sell Auckland Airport shares when they want to. Key Points It is most unlikely that there will ever be another takeover offer or control transaction for Auckland Airport if the CPPIB Offer is successful. This Offer is not optimal given that effective control passes to CPPIB, but the Offer price being paid by CPPIB is not available on all of the shares. A concentration of shares may reduce the influence of other shareholders and liquidity in the share market. 4. The outcome of CPPIB s subsequent amalgamation proposal is uncertain and value enhancing opportunities may be permanently lost If CPPIB is successful in achieving a 40% shareholding, it proposes to use all reasonable steps within its control to ensure that an amalgamation proposal is presented to shareholders. This may not occur until CPPIB s amalgamation proposal is intended to result in increased distributions to shareholders which will be more tax efficient to nontax paying shareholders and foreign investors, including CPPIB. As outlined in point 7 below, the Directors believe there would be real merit in restructuring the Company to introduce a new cornerstone shareholder which can bring additional airport industry expertise or tourism development opportunities for the benefit of all shareholders. The Directors have two concerns with CPPIB s subsequent amalgamation proposal: There is considerable uncertainty as to whether this proposal will proceed. The Directors were concerned about risks associated with the previous CPPIB amalgamation proposal, including the forecast debt levels and the ability of Auckland Airport to make the necessary investments required to sustain its business. The proposed changes to the indicative terms of the stapled securities announced by CPPIB on 6 December 2007 do not alter the view of Directors. In order to be successful, the CPPIB amalgamation proposal requires: A favourable binding ruling from the Inland Revenue Department. The Directors are of the view that the tax ruling condition is unlikely to be met. The Directors of Auckland Airport to form the view that the amalgamation proposal is in the best interests of the Company. The Board of Directors at the time the CPPIB amalgamation proposal is to be considered may not be the current Board of Directors. However, as noted above, Directors of Auckland Airport have (by majority) previously formed the view that an amalgamation substantially similar to that proposed by CPPIB was not in the best interests of the Company. As noted above, it is unlikely that the recent changes to the indicative terms of the stapled securities proposed by CPPIB would alter that view. A majority of those shareholders who vote on a resolution to consider the amalgamation must approve it. CPPIB and its associated persons would not be able to vote on that resolution. Therefore, shareholders other than CPPIB will have the right to vote on and approve any amalgamation proposal. Given these issues, the Directors are of the view that there is considerable uncertainty as to whether the CPPIB amalgamation proposal will proceed. As such, acceptance of the CPPIB Offer would most likely result in the opportunity to complete a value enhancing restructuring of the Company being lost. Key Points The CPPIB amalgamation proposal is unlikely to proceed. The Board of Directors of Auckland Airport (by majority) did not previously support the amalgamation proposal from CPPIB. If the Offer is successful, the opportunity to restructure the Company on a value enhancing basis may be lost forever. 5. The Offer price may not fully reflect the future prospects of Auckland Airport Auckland Airport shares have performed strongly over a long period of time. $1,000 invested in the public share offering in July 1998 would be worth approximately $6,900 today (assuming all dividends and capital repayments were re-invested), providing shareholders with a compound return of 23% per annum.

14 Auckland International Airport Limited Target Company Statement 9 The graph below shows the performance of Auckland Airport shares compared with the NZX50 index since the Company was listed. Notes: 1. NZX50 index level rebased to Auckland Airport share price as at 28 July Auckland Airport share price adjusted for 7:25 share cancellation and capital repayment made in October 2002 and 4:1 share split completed in April 2005 The Directors believe that the value asociated with growth in global aviation has been demonstrated recently in the price paid for Hobart airport, which when announced on 13 December 2007, was 33 times financial year 2007 earnings before interest, tax, depreciation and amortisation. This was a record price for airports in the region. CPPIB, by comparison, is paying 22 times financial year 2007 earnings under the Offer. The Offer price of $ per share for 39.2% of the shares in Auckland Airport is a price at a point in time. In addition, the valuation range of $ $3.48 assessed by the Independent Adviser is a valuation at this time based on the Company s current best estimates of its future financial performance and position. This valuation is also highly sensitive to key assumptions, including cost of capital (which factors in interest rates) and the terminal growth rate assumed by the Independent Adviser. The Company s business participates in the long-term growth dynamics of the global aviation industry. The Board, in its combined experience and judgement, is optimistic about the prospects for Auckland Airport and the continued long-term growth of the global aviation industry, especially for New Zealand as a leading tourism destination. In reaching your view, the Directors encourage shareholders to read the report from TFI and Airbiz contained in Section 6 of this Target Company Statement. This report provides a summary of the possible implications for passenger and aircraft growth at Auckland Airport over the next five years. However, the Directors appreciate that past performance is no guarantee of future performance and it is not possible to accurately predict future events with certainty. Shareholders should be aware that the Company is exposed to certain risks and variables. These include passenger growth below expectations, one-off global shocks and changes to the regulatory environment. Further risks associated with the Company s business are summarised in the Independent Adviser s report included in Section 5 of this Target Company Statement. Key Points Auckland Airport has significant growth opportunities and future prospects. Auckland Airport has been a successful business that has performed strongly over a long period of time. Auckland Airport participates in the long-term growth prospects for air travel in the Asia Pacific and Australasian markets. The headline Offer price could be considered attractive today, but it may significantly undervalue the business in the long term. The valuation range is highly sensitive to key assumptions and may not fully reflect Auckland Airport s upside potential. However, there are risks and variables that shareholders should also take into account when considering future prospects. 6. Impact on the Company s brand, corporate reputation and standing in the wider community Should Auckland Airport become substantially owned by a single foreign party (such as CPPIB) and that party becomes influential over the Company, its strategy and future direction, then New Zealand public opinion and political sentiment may be negatively affected and this may adversely affect the Company s brand, corporate reputation and standing in the wider community. Key Points There is a risk that substantial ownership of Auckland Airport by a single foreign party may impact the Company s brand, corporate reputation and standing in the community. This could adversely impact value in the long term. 7. Introduction of a new cornerstone investor for Auckland Airport CPPIB proposes to become a long-term cornerstone shareholder with 40% of Auckland Airport, bringing international opportunities to Auckland Airport. While the Directors believe CPPIB would be a stable and responsible long-term supportive investor, the Directors believe CPPIB would be unlikely to bring any airport industry expertise or tourism growth opportunities that will enhance the Company s business for the benefit of all shareholders. The Directors have consistently confirmed their preference for a cornerstone shareholder that can bring additional airport, aviation or tourism development opportunities. Such benefits would generate value to Auckland Airport shareholders beyond that contained in the current business plan, as successful implementation would be likely to create revenue that largely flows through to cash flow and profit. If the Offer is not successful, the Directors of Auckland Airport will commence a process to select a new cornerstone shareholder to deliver these benefits for all shareholders. While the Directors have no certainty on the outcome of such a process, they consider that CPPIB does not have the credentials necessary to deliver these long-term benefits for shareholders. Key Points Auckland Airport would benefit from a cornerstone shareholder which can bring additional airport expertise or tourism development opportunities. This would bring additional value for all shareholders. The CPPIB Offer does not provide these additional benefits. If the Offer fails, Directors will consider seeking a cornerstone shareholder of this nature.

15 10 Auckland International Airport Limited Target Company Statement Section 3: Frequently asked questions If you have any questions about the Offer, you should contact your financial or other professional adviser, or you can call Computershare on Should I accept the Offer? The Directors recommend that you: OBJECT to CPPIB making the Offer and owning 40% of Auckland Airport; and HOLD your shares. You are, however, encouraged to read this Target Company Statement and the Offer and to form your own view on the merits of the Offer and whether to vote to object to or approve CPPIB making the Offer and/or accept it or hold your shares. Will I be forced to sell my Shares? You cannot be forced to sell your shares under a partial takeover offer. Under the Takeovers Code, only once an acquirer has received acceptances in respect of 90% of the voting rights of a target company can it proceed to compulsorily acquire the remaining shares. CPPIB is not seeking to own more than 40% of Auckland Airport. When do I have to make a decision? CPPIB s offer will remain open until 5pm New Zealand time, 13 March The Offer period cannot be extended beyond this date, as the Offer will have been open for the maximum number of days allowable under the Takeovers Code (90 days). How do I accept the Offer? You should follow the instructions set out in the Offer. Why have CPPIB sent me four forms? The four forms are: Green Acceptance Form to unconditionally accept the Offer. Blue Acceptance Form to conditionally accept the Offer using the acceptance facility (described in more detail below). Withdrawal Notice to withdraw your shares from the Offer, if you have previously submitted the Blue Acceptance Form. Approval Form to vote on whether you approve or object to CPPIB making the Offer and owning 40% of Auckland Airport. Depending on how you wish to vote on CPPIB making the Offer and owning 40% of Auckland Airport and how many shares you wish to put into the Offer, you will need to fill in one or more of these forms. By way of example: If you do not want to sell your shares, do not submit an acceptance form. However, you can still fill in the Approval Form and express your view on whether CPPIB should or should not be allowed to make the Offer and own 40% of Auckland Airport. If you wish to accept the Offer, you have the choice of conditional (blue) or unconditional (green) acceptance forms, and may also submit the Approval Form to express your view on whether CPPIB should be allowed to make the Offer and own 40% of Auckland Airport. The following questions will assist you in choosing which form or forms to fill out.

16 Auckland International Airport Limited Target Company Statement 11 Can I accept the Offer for only some of my shares? Yes, you may accept the Offer for as many of your shares as you wish, as set out in the instructions set out in the Offer. However, you should note the point under the next question with respect to scaling of acceptances. Can I accept the Offer for all of my shares? Yes, although it is not guaranteed that all of your shares will be acquired under the Offer. The Offer is made for 39.2% of the shares in Auckland Airport (39.53% of Auckland Airport shares not already owned by CPPIB). Accordingly, acceptances under the Offer may be subject to scaling, as described under point 1 of Section 2 of this Target Company Statement. Can I accept the Offer, but object to CPPIB owning 40% of Auckland Airport? Yes. You should follow the instructions set out in the Offer to submit either the Green Acceptance Form or the Blue Acceptance Form (use blue if you wish to be able to withdraw your shares later), accepting the Offer in respect of a number of your shares (the number of shares you accept the Offer in respect of is up to you). To vote against CPPIB holding 40% of Auckland Airport, you should submit the Approval Form selecting Object. Can I hold my shares, but approve CPPIB owning 40% of Auckland Airport? Yes. You should follow the instructions set out in the Offer to fill in the Approval Form, selecting Approve in respect of CPPIB making the Offer and owning 40% of Auckland Airport. You should not submit either the Green Acceptance Form or Blue Acceptance Form if you do not wish to accept the Offer in respect of your Auckland Airport shares. Can I object to CPPIB owning 40% of Auckland Airport and change my mind later? No. Once you have submitted the Approval Form, you are unable to change your vote on CPPIB making the Offer and owning 40% of Auckland Airport. However, if you have submitted the Blue Acceptance Form, you are able to withdraw your shares put into the acceptance facility by using the Withdrawal Notice. See the next question for more information. How does the acceptance facility relate to the two acceptance forms? If you accept the Offer using the Blue Acceptance Form, your accepted shares will be placed in an acceptance facility. This facility allows you to withdraw your shares from the Offer by completing and submitting the Withdrawal Notice to Computershare in accordance with the instructions on the Withdrawal Notice. A Withdrawal Notice will only be effective if it is actually received by Computershare prior to CPPIB receiving a Confirmation Notice from Computershare. Computershare will provide a Confirmation Notice to CPPIB immediately after CPPIB has received such number of acceptances (including acceptances under the acceptance facility which have not been withdrawn) under the Offer which would result in it owning 40% of Auckland Airport if the Offer became unconditional. On the provision of a Confirmation Notice by Computershare, acceptances placed in the acceptance facility will cease to be capable of withdrawal. If you accept the Offer using the Green Acceptance Form, you are unable to withdraw your shares at a later date (unless consideration for the Offer is not sent within the period specified in clause 2 of Terms of the Offer in the Offer). It is important to note, as described in the previous answer, that, once you have lodged your Approval Form, you are not able to change your vote in relation to CPPIB making the Offer and owning 40% of Auckland Airport. What is the consideration under the Offer? The consideration under the Offer is $ cash per Auckland Airport share acquired. As noted above in point 2 of Section 2 of this Target Company Statement, however, as this Offer is only for 39.2% of the shares in Auckland Airport, the overall value you receive for all of your shares under the Offer will depend on the number of shares which you decide to sell, the number of shares sold by other shareholders and the value of your remaining shares in the market following completion of the Offer. This value may be somewhat less than $ per share. What are the conditions of the Offer? The Offer is primarily conditional upon the following: Shareholders of Auckland Airport voting to approve CPPIB making the Offer holding more voting rights than shareholders of Auckland Airport voting to object to that. Acceptances in respect of 39.53% of the shares in Auckland Airport not already owned by CPPIB. Approval by the Overseas Investment Office. Other conditions of the Offer are outlined in the Offer. Is the Offer subject to automatic extension? No. The Offer period is 90 days, which is the maximum number of days that an Offer can stay open under the Takeovers Code. What is a Target Company Statement? This booklet comprises the Target Company Statement including information required by the Takeovers Code. Auckland Airport is required to produce the Target Company Statement in response to CPPIB s Offer. Auckland Airport s Target Company Statement contains information to help you decide whether to accept the Offer for your shares in Auckland Airport. Who should I call if I have questions? If you have additional questions about your Auckland Airport shares or the Offer, you should contact your financial or other professional adviser, or call Computershare on

17 12 Auckland International Airport Limited Target Company Statement Section 4: Statutory information

18 Auckland International Airport Limited Target Company Statement Date 1.1 This Target Company Statement is dated 17 December Offer 2.1 This Target Company Statement relates to a partial takeover offer ( Offer ) by NZ Airport NC Limited ( Offeror ) for 39.53% of the fully paid ordinary shares ( Auckland Airport Shares ) of Auckland International Airport Limited ( Auckland Airport ) not already held or controlled by the Offeror. This equates to 39.2% of all Auckland Airport Shares. The Offeror gave notice ( Takeover Notice ) pursuant to Rule 41 of the Takeovers Code of its intention to make the Offer on 16 November 2007 ( Notice Date ). 2.2 The Offeror is a wholly-owned subsidiary of the Canada Pension Plan Investment Board ( CPPIB ). The acquisition of the Auckland Airport Shares pursuant to the Offer, when combined with the 9,526,255 Auckland Airport Shares which CPPIB and its subsidiaries (together the CPPIB Group ) hold or control as at the Notice Date, would result in the CPPIB Group holding or controlling 40% (rounded to two decimal places) of all Auckland Airport Shares. 2.3 The terms of the Offer are set out in an offer document ( Offer Document ), which was sent to holders of Auckland Airport Shares by the Offeror on 14 December Target Company 3.1 The name of the target company is Auckland International Airport Limited. 4. Directors of Auckland Airport 4.1 The directors of Auckland Airport are: Anthony Noy Frankham (Chairman) Keith Sharman Turner (Deputy Chairman) John Alston Brabazon Richard John Didsbury Hugh Richmond Lloyd Morrison Joan Withers 5. Ownership of Equity Securities of Auckland Airport 5.1 Schedule 1 to Section 4 of this Target Company Statement sets out the number, designation and the percentage of equity securities of any class of Auckland Airport held or controlled by: (a) each director and senior officer of Auckland Airport (a Director or Senior Officer, respectively) and their associates; and (b) any other person holding or controlling 5% or more of the class, to the knowledge of Auckland Airport. 5.2 Except as set out in Schedule 1 to Section 4 of this Target Company Statement, no other person referred to in paragraphs 5.1(a) or 5.1(b) above holds or controls equity securities of Auckland Airport. 5.3 Schedule 2 to Section 4 of this Target Company Statement sets out the number of equity securities of Auckland Airport: (a) that have, during the two year period ending on the date of this Target Company Statement, been issued to Directors and Senior Officers or their associates; or (b) in which Directors and Senior Officers or their associates have, during the two year period ending on the date of this Target Company Statement, obtained a beneficial interest under any employee share scheme or other remuneration arrangement, together with the price at which any such equity securities were issued or provided. 6. Trading in Auckland Airport Equity Securities 6.1 Schedule 3 to Section 4 of this Target Company Statement sets out the number and designation of any equity securities of Auckland Airport that have, during the six month period before 11 December 2007 (being the latest practicable date before the date of this Target Company Statement), been acquired or disposed of by a Director, Senior Officer or their associates, or any person holding or controlling 5% or more of any class of equity securities in Auckland Airport, together with the consideration per equity security for, and the date of, each such transaction. 6.2 In the case of multiple acquisitions or disposals in any given week by a person holding 5% or more of any class of equity securities in Auckland Airport, the total number of securities, and the weighted average consideration per security, acquired or disposed of in that week is set out in Schedule 3 to Section 4 of this Target Company Statement. 7. Acceptance of Offer 7.1 As at the date of this Target Company Statement, no Directors or Senior Officers or their associates have accepted, or intend to accept, the Offer. All Directors and Senior Officers and their associates intend to vote to object to the Offeror making the Offer. The following Directors and Senior Officers and associates of Directors and Senior Officers may, however, accept the Offer if it becomes clear that the Offer is likely to proceed: (a) Anthony Frankham and his associates set out in Schedule 1 to Section 4 of this Target Company Statement; (b) Richard Didsbury; (c) Joan Withers; (d) H.R.L. Morrison & Co Group Limited, which is an associate of Lloyd Morrison; (e) Don Huse; (f) Tony Gollin; (g) Steve Reindler. 8. Ownership of Equity Securities of Offeror 8.1 Neither Auckland Airport, nor any Director or Senior Officer or any of their associates, holds or controls any equity securities of the Offeror. 9. Trading in Equity Securities of Offeror 9.1 Neither Auckland Airport, nor any Director or Senior Officer or any of their associates, has acquired or disposed of any equity securities of the Offeror during the six month period before 11 December 2007 (being the latest practicable date before the date of this Target Company Statement). 10. Arrangements between Offeror and Auckland Airport 10.1 Except as set out in paragraphs 10.2 to 10.6 below, no agreement or arrangement (whether legally enforceable or not) has been made, or is proposed to be made, between the Offeror or any associate of the Offeror, and Auckland Airport or any related company of Auckland Airport, in connection with, in anticipation of, or in response to, the Offer CPPIB is an associate of the Offeror because the Offeror is a wholly-owned subsidiary of CPPIB. On 18 June 2007, Auckland Airport and CPPIB entered into a confidentiality agreement ( CPPIB Confidentiality Agreement ) pursuant to which Auckland Airport and CPPIB agreed to disclose confidential information to each other and to keep confidential any confidential information disclosed by the other. Auckland Airport also entered into confidentiality agreements with a number of banks which CPPIB wished to approach for the purposes of obtaining financing for the proposal referred to in paragraph 10.3 below ( Bank Confidentiality Agreements ).

19 14 Auckland International Airport Limited Target Company Statement 10.3 Following entry into the CPPIB Confidentiality Agreement, CPPIB carried out due diligence investigations in relation to Auckland Airport. On 21 September 2007, Auckland Airport announced that it had received a discussion paper from CPPIB in relation to a proposed transaction and that the board of directors of Auckland Airport ( Auckland Airport Board ) would consider the proposal set out in the discussion paper and obtain expert advice on its merits. On 31 October 2007, Auckland Airport announced the Auckland Airport Board s decision to cease discussions with CPPIB in connection with the proposal, on the basis that the majority of the Auckland Airport Board did not believe that pursuing the proposal would be in the best interests of Auckland Airport or its shareholders On 7 November 2007, CPPIB announced: (a) that it would make an all-cash partial takeover offer of NZ$ per Auckland Airport Share to take its holding to 40% of Auckland Airport Shares; and (b) that it would take all reasonable steps within its control to ensure that as soon as possible after successful completion of the offer referred to in paragraph 10.4(a) above, an amalgamation proposal ( CPPIB Amalgamation Proposal ) involving Auckland Airport would be placed in front of Auckland Airport shareholders Further details of the CPPIB Amalgamation Proposal are set out in the Offer Document. For the reasons set out on page 8 of this Target Company Statement, the Directors are of the view that there is considerable uncertainty as to whether the CPPIB Amalgamation Proposal will proceed In paragraph 10 of Appendix 1 of the Offer Document, it is stated that CPPIB and the Offeror have entered into a deed ( Voting Restriction Deed ) for the benefit of, and enforceable by, Auckland Airport and any shareholder of Auckland Airport under which CPPIB and the Offeror have undertaken that they (and any other person which CPPIB controls) will not exercise more than 30% of the votes that may be cast on resolutions to elect or remove Directors (or directors of any company in which they hold less than 100% of the voting securities following the amalgamation contemplated by the CPPIB Amalgamation Proposal). Although Auckland Airport is not party to the Voting Restriction Deed, it has, as noted above, the right to enforce the Voting Restriction Deed. 11. Relationship between Offeror, and Directors and Officers of Auckland Airport 11.1 Except as set out in paragraphs 11.2 and 11.3 below, no agreement or arrangement (whether legally enforceable or not) has been made, or is proposed to be made, between the Offeror or any associates of the Offeror, and any director or senior officer of Auckland Airport or any related company of Auckland Airport in connection with, in anticipation of, or in response to, the Offer It is stated in paragraph 11 of Appendix 1 of the Offer Document that the Offeror expects that all of the Senior Officers at the time of the amalgamation contemplated by the CPPIB Amalgamation Proposal will, if such amalgamation is implemented, become senior officers of the amalgamated company and that the amalgamated company will, from the time of such amalgamation, continue to remunerate those senior officers in the same, or substantially the same, way as they are being remunerated by Auckland Airport immediately before the amalgamation If the amalgamation contemplated by the CPPIB is implemented, the Directors will cease to be directors of Auckland Airport because Auckland Airport will have amalgamated into the amalgamated company. It is stated in paragraph 11 of Appendix 1 of the Offer Document that some or all of the Directors may also become directors of the amalgamated company or its related companies No Director or Senior Officer is also a director or senior officer of the Offeror, or any related company of the Offeror. 12. Agreement between Auckland Airport, and Directors and Officers 12.1 Except as set out in paragraphs 12.2 to 12.4 below, no agreement or arrangement (whether legally enforceable or not) has been made, or is proposed to be made, between Auckland Airport or any related company of Auckland Airport, and any of the directors or senior officers or their associates of Auckland Airport or its related companies, under which a payment or other benefit may be made or given by way of compensation for loss of office, or as to their remaining in or retiring from office in connection with, in anticipation of, or in response to, the Offer In accordance with New Zealand Stock Exchange ( NZSX ) Listing Rule 3.5.2, a Director or former Director, or his or her dependents, may receive a lump sum payment or pension in connection with the retirement or cessation of office of that Director, only if: (a) the amount of the payment, or the method of calculation of the payment, is authorised by an ordinary resolution of Auckland Airport; or (b) the Director or former Director was in office on or before 1 May 2004 and has continued to hold office since that date, provided that the total amount of the payment (or the base for the pension) does not exceed the total remuneration of that Director in his or her capacity as a Director in any three years chosen by Auckland Airport The Directors resolved on 23 November 2004 to freeze the retirement allowances payable to Directors at the level payable as at 23 November 2004 and that retirement allowances would not be paid to Directors appointed on or after 21 April Anthony Frankham and Joan Withers were appointed as Directors before 21 April 2004, and accordingly are entitled to a lump sum payment or pension in connection with the retirement or cessation of office as Director without shareholder approval (of $150,000 and $120,000, respectively) The employment agreements between Auckland Airport and certain Senior Officers were varied in July 2007 to provide for various payments to be made upon the completion of a 49% or greater change in ownership of Auckland Airport and/or in connection with such a change in control. In October 2007, the relevant employment agreements were varied so that the definition of change in control was amended to a 30% or greater change in ownership of Auckland Airport ( Change in Control ). This will therefore include the Offer if it is successful. The details of these payments are summarised below: (a) The following Senior Officers are entitled to the following retention payments on the earlier of 30 June 2008 or the date three months following a Change in Control if that Senior Officer remains an employee of Auckland Airport at the date which is three months after a Change in Control: (i) Robert Sinclair and Charles Spillane are each entitled to a payment equivalent to nine months fixed annual remuneration; (ii) Nick Forbes, Tony Gollin, Chris Gudgeon, Don Huse, Judy Nicholl and Tony Wickstead are each entitled to a payment equivalent to three months fixed annual remuneration. (b) The following Senior Officers are entitled to the following redundancy compensation if redundancy occurs following a Change in Control and such Change in Control occurs prior to 30 June 2009: (i) Nick Forbes, Tony Gollin, Chris Gudgeon, Judy Nicholl, Robert Sinclair, Charles Spillane and Tony Wickstead are

20 Auckland International Airport Limited Target Company Statement 15 each entitled to a payment equivalent to six months fixed annual remuneration; (ii) Don Huse is entitled to a payment up to a maximum of six months fixed annual remuneration, subject to a pro rata reduction if such redundancy occurs between 1 May 2008 and 31 October (c) Robert Sinclair and Charles Spillane are each entitled to a resignation entitlement equivalent to six months fixed annual remuneration following a Change in Control if they resign by giving three months notice, within six months of the date of any Change in Control. In such circumstances, their entitlement to any outstanding long-term incentive plans of Auckland Airport will be as if termination had occurred on the grounds of redundancy. 13. Interests of Directors and Officers of Auckland Airport in contracts of Offeror or related company 13.1 Except as set out in paragraph 13.2 below, no Director or Senior Officer or their associates has an interest in any contract to which the Offeror, or any related company of the Offeror, is a party Although no Director or Senior Officer or their associates is a party to the Voting Restriction Deed, as noted in paragraph 10.6 above, the Voting Restriction Deed is enforceable by all shareholders of Auckland Airport. Certain Directors, Senior Officers and their associates are shareholders of Auckland Airport. Details of such shareholdings are set out in Schedule 1 to Section 4 of this Target Company Statement. 13A. Interests of Auckland Airport s substantial security holders in material contracts of Offeror or related company 13A.1 To the knowledge of the Auckland Airport Board, except as set out in paragraph 13A.2 below, no person who, to the knowledge of the Directors or the Senior Officers holds or controls 5% or more of any class of equity securities of Auckland Airport, has an interest in any material contract to which the Offeror, or any related company of the Offeror, is a party. 13A.2 Although no person who holds 5% of more of any class of equity securities of Auckland Airport is a party to the Voting Restriction Deed, as noted in paragraph 10.6 above, the Voting Restriction Deed is enforceable by all shareholders of Auckland Airport. 14. Additional Information 14.1 In the opinion of the Directors, no additional information, to the knowledge of Auckland Airport, is required to make the information in the Offer Document correct or not misleading. 15. Recommendation 15.1 For the reasons set out in the Chairman s Letter set out in Section 1 of this Target Company Statement and the more detailed reasons set out in Section 2 of this Target Company Statement, the Directors are of the view that, on balance, and giving the weight they consider appropriate to various factors set out in those sections, the Offer is not in the best interests of shareholders when considered on a long-term basis. Accordingly, the Directors unanimously recommend that shareholders: (a) object to CPPIB making the Offer and owning 40% of Auckland Airport; and (b) hold their Auckland Airport Shares. Directors will update shareholders with respect to the progress on voting to approve or object to the Offeror making the Offer and owning 40% of Auckland Airport Shares and the level of acceptances in relation to the Offer. If it becomes apparent on or before 6 March 2008 that the Offer is likely to succeed contrary to the recommendation of Directors, the Directors may recommend to shareholders that they accept the Offer to sell some or all of their Auckland Airport Shares. This will mean that shareholders wishing to, will benefit from the Offer price for those Auckland Airport Shares they sell under the Offer The reasons for the recommendation contained in paragraph 15.1 above are set out in the Chairman s Letter in Section 1 of this Target Company Statement and in Section 2 of this Target Company Statement. In considering whether or not shareholders should approve or object to the Offeror making the Offer and owning 40% of Auckland Airport and whether or not to sell some or all of their Auckland Airport Shares, the Directors recommend shareholders should also have regard to: (a) the Independent Adviser s report, which is referred to in paragraph 19.1 below and which is included in Section 5 of this Target Company Statement; and (b) the report from Tourism Futures International Limited and Airbiz Aviation Strategies Limited, which is included in Section 6 of this Target Company Statement. 16. Actions of Auckland Airport 16.1 On the Notice Date, Auckland Airport announced that it had asked its financial advisers, First NZ Capital Limited and Credit Suisse (Australia) Limited, to actively solicit takeover offers in relation to Auckland Airport. Subject to the execution of a confidentiality agreement, parties expressing interest in Auckland Airport may be given access to information regarding Auckland Airport for the purposes of carrying out due diligence investigations in relation to Auckland Airport. As at the date of this Target Company Statement, a prima facie credible party has expressed an interest in gaining access to information regarding Auckland Airport. However, no confidentiality agreement has been entered into with that party Other than the CPPIB Confidentiality Agreement and the Bank Confidentiality Agreements and except as described in paragraph 16.1 above, there are no material agreements or arrangements (whether legally enforceable or not) of Auckland Airport and its related companies entered into as a consequence of, in response to, or in connection with, the Offer Except as described in paragraph 16.1 above, there are no negotiations underway as a consequence of, in response to, or in connection with, the Offer that relate to or could result in: (a) an extraordinary transaction, such as a merger, amalgamation or reorganisation, involving Auckland Airport or any of its related companies; or (b) the acquisition or disposition of material assets by Auckland Airport or any of its related companies; or (c) an acquisition of equity securities by, or of, Auckland Airport or any related company of Auckland Airport; or (d) any material change in the equity securities on issue, or policy relating to distributions, of Auckland Airport. 17. Equity Securities of Auckland Airport 17.1 Auckland Airport has 1,222,237,639 Auckland Airport Shares on issue. Subject to certain conditions in the constitution of Auckland Airport, each Auckland Airport Share confers upon the holder the right to: (a) an equal share in the distribution of the surplus assets on liquidation of Auckland Airport; (b) an equal share in distributions authorised by the Auckland Airport Board; and (c) cast one vote on a show of hands, or to cast one vote per share on a poll, at a meeting of shareholders of Auckland Airport.

21 16 Auckland International Airport Limited Target Company Statement 17.2 Auckland Airport has 3,360,000 options ( Auckland Airport Options ) on issue to purchase Auckland Airport Shares. 1,360,000 Auckland Airport Options were issued pursuant to the AIAL Executive Option Plan dated 17 November The remaining 2,000,000 Auckland Airport Options were issued to Don Huse pursuant to an agreement dated 11 July 2003 in connection with Mr Huse s employment by Auckland Airport. The material terms of the outstanding options are set out below The holders of Auckland Airport Options ( Auckland Airport Optionholders ) are entitled to convert each Auckland Airport Option into one Auckland Airport Share during the relevant exercise period relating to the relevant Auckland Airport Option by giving written notice to Auckland Airport and paying the relevant exercise price. A notice to exercise Auckland Airport Options may not be given in respect of less than 1,000 Auckland Airport Options The exercise periods for Auckland Airport Options are as follows: (a) 720,000 Auckland Airport Options may be exercised between 10 September 2005 and 10 September 2008; (b) 1,000,000 Auckland Airport Options may be exercised after 11 July 2006; (c) 500,000 Auckland Airport Options may be exercised after 11 July 2007; (d) 500,000 Auckland Airport Options may be exercised after 11 July 2008; (e) 640,000 Auckland Airport Options may be exercised between 13 January 2007 and 13 January 2010, in each case subject to the relevant Auckland Airport Options not lapsing as described in paragraph 17.6 below The exercise price for an Auckland Airport Option is determined based on the Auckland Airport Share price at the date of issue of the Auckland Airport Option, adjusted to reflect movements in the NZSE Gross 40 Index (in the case of the Auckland Airport Options referred to in paragraphs 17.4 (a) and (e) above) or the NZSX 50 Gross Index (in the case of the Auckland Airport Options referred to in paragraphs 17.4 (b) to (d) above) between the date of issue and the date of exercise of the Auckland Airport Option, less any dividends and capital repayments which Auckland Airport has paid during the relevant period An Auckland Airport Option shall lapse and cease to be available for exercise: (a) on the sixth anniversary of the date of issue of that Auckland Airport Option or, in the case of the Auckland Airport Options referred to in paragraphs 17.4(b) to (d) above, 4 August 2009; (b) other than in certain circumstances, on the Auckland Airport Optionholder ceasing to be a full time employee of Auckland Airport or a subsidiary of Auckland Airport Auckland Airport Options carry no rights to share in the surplus assets on the liquidation of Auckland Airport, vote at meetings of shareholders of Auckland Airport or receive dividends Adjustments may be made to the terms of an Auckland Airport Option if before the date Auckland Airport receives an exercise notice from an Auckland Airport Optionholder in respect of an Auckland Airport Option: (a) Auckland Airport makes or announces any bonus issue of Auckland Airport Shares or other securities, or makes or announces any rights issue, or other offer to holders of Auckland Airport Shares to take up Auckland Airport Shares or other securities; (b) any consolidation or subdivision of Auckland Airport Shares, share buy-back, amalgamation, or other reconstruction of or adjustment to the Auckland Airport Shares or the share structure of Auckland Airport, of any nature whatsoever, occurs or is announced; or (c) any offer is made for the acquisition of the Auckland Airport Shares It is not intended that any amendments be made in respect to the terms of any Auckland Airport Options in connection with the Offer. 18. Financial information 18.1 Each person to whom the Offer is made is entitled to obtain from Auckland Airport a copy of the most recent annual report of Auckland Airport (being the annual report for the year ended 30 June 2007) ( 2007 Annual Report ). Requests may be made to: Corporate Secretary Auckland International Airport Limited PO Box Auckland Airport Manukau 2150 NEW ZEALAND 18.2 A copy of the 2007 Annual Report is also available on Auckland Airport s website, at The material changes in the financial or trading position, or prospects, of Auckland Airport since 30 June 2007 are: (a) at Auckland Airport s 2007 annual meeting, which was held on 20 November 2007, the following announcements were made in relation to Auckland Airport s (unaudited) results for the four month period to October 2007 ( Relevant Period ) and Auckland Airport s financial outlook: (i) During the Relevant Period, international passenger movements (excluding transits and transfers) were up 4.0% to 2,109,261 and domestic passenger movements increased by 6.5% to 1,762,615. Total passenger numbers increased 4.0% to 4,179,658. However, total aircraft movements were down 1.9% over this period. (ii) The outlook for the airline summer schedule appears to be consistent with last year, although the expectation is for higher load factors. (iii) Reflecting the increased passenger volumes, along with recent aeronautical and commercial pricing resets, revenue for the Relevant Period increased 7.0% on the corresponding period last year to $110.9 million. However, there has been some pressure on operating expenses. Earnings before interest, tax and depreciation ( EBITDA ) for the Relevant Period was $84.6 million, an increase of 3.5% over the equivalent period in the previous year. (iv) Surplus after tax for the Relevant Period was $31.9 million, compared with $32.4 million for the previous year. The reduction reflects the on-going depreciation and interest costs being incurred by Auckland Airport in connection with its current investment programme. (v) Based on the current demand environment, the Directors continue to expect revenue growth for the 2008 financial year to be in the order of 7.0%. However, with the additional cost pressures being experienced, particularly in personnel, rates, legal and consultancy expenses, it is likely that EBITDA growth will be around 6.0% based on EBITDA for the 2007 financial year excluding the long-term incentive provision. This also excludes any revaluation gain in connection with the Auckland Airport s investment property portfolio. (vi) Auckland Airport has incurred to date significant oneoff expenses of approximately $4.5 million directly in connection with the review and investigation of the

22 Auckland International Airport Limited Target Company Statement 17 restructuring proposals, including the CPPIB and Dubai Aerospace Enterprise ( DAE ) proposals. Auckland Airport s review of these proposals has also resulted in some additional operating expenses as referred to in paragraph 18.3(a)(iii) above. As set out in the 2007 Annual Report, it should be noted that the outlook statement with respect to the financial performance for the remainder of the 2008 financial year is subject to any material adverse events, significant one-off expenses, deterioration due to the current global market conditions or other unforeseeable circumstances. Furthermore, it is expected that additional one-off costs of approximately $9 million to $12 million will be incurred this financial year in connection with the Offer. These costs include the fees and expenses of Auckland Airport s financial, legal, PR and other advisers, the fees of the Independent Adviser, broker handling fees, and design, printing, mailing and advertising costs. Some of these costs will be recoverable from the Offeror in accordance with Rule 49 of the Takeovers Code. (b) It was also announced at the 2007 annual meeting that Auckland Airport s chief executive officer, Don Huse, would leave Auckland Airport before Auckland Airport s next annual meeting. (c) On 21 November 2007, the Minister of Commerce and the Minister of Transport announced proposed changes to the Airport Authorities Act 1966 and the Commerce Act 1986, in relation to the regulatory environment for airports in New Zealand: (i) The Commerce Commission will set key inputs, pricing principles and guidelines on the weighted average cost of capital for Auckland Airport by The announcements indicate that key inputs will include the valuation of assets, the allocation of common costs and the treatment of taxation for regulatory accounts, amongst other things. (ii) Auckland Airport will be subject to an information disclosure and price monitoring regime from when Auckland Airport resets its charges in The Commerce Commission will be responsible for setting the information disclosure requirements and monitoring Auckland Airport s prices. (iii) The Commerce Commission may undertake further investigations following its price monitoring. The Minister of Commerce and the Minister of Transport may make further decisions regarding the regulatory regime for Auckland Airport following a recommendation from the Commerce Commission. These recommendations may include placing Auckland Airport under price control or making Auckland Airport subject to a negotiate arbitrate regime. (iv) A separate review into the regulatory regime for Auckland Airport will be undertaken by consultants managed by the Ministry of Economic Development. The announcements indicate that this review will consider whether Auckland Airport should be subject to other forms of regulation, such as a negotiate arbitrate regime. The review will report back to the Government by 30 June (d) The Parliamentary Counsel Office has been instructed to draft legislation implementing the decisions referred to in paragraph 18.3(c) above. The Government s intention is to introduce and pass legislation next year. However, it is not certain that the reforms announced on 21 November 2007 will remain unchanged in any final legislation amending the Commerce Act 1986 and much of the detail is currently being developed. Also, in an MMP environment, it is not certain that legislation will be passed, despite the Government s expressed intentions. On 22 November 2007, Auckland Airport announced that it would review and consider the implications of the changes for Auckland Airport s business and investment programme once more detail about the proposed changes is available. However, shareholders should be aware that these proposed changes to Auckland Airport s regulatory environment may have an impact on Auckland Airport s revenues, including its aeronautical revenues in particular, and that this impact may be material Two general duty free retailers currently operate at Auckland Airport: DFS Group Limited ( DFS ) and The Nuance Group ( Nuance ). DFS has sought a clearance under the Commerce Act 1986 to acquire 100% of the shares in, or the underlying assets of, Nuance s New Zealand operation. The Commerce Commission is currently considering the application. Nuance s licence expires in August 2009 while DFS has a licence which continues to Further information about the assets, liabilities, profitability and financial affairs of Auckland Airport that could reasonably be expected to be material to the making of a decision to accept or reject the Offer is set out in the Independent Adviser s report referred to in paragraph 19.1 below and which is included in Section 5 of this Target Company Statement, including the risks and opportunities associated with an investment in Auckland Airport set out on page 17 of that report. In addition to these factors, shareholders should take into account the following key factors in making their decision: (a) the potential impact on passenger growth and the demand for air travel resulting from increased awareness of the impact of carbon emissions on the environment and the associated costs on air travel; (b) the increased real cost of airfares resulting from increased oil prices; (c) the impact of the recent global liquidity crisis on Auckland Airport s borrowing costs; (d) the possibility of a commercial airport being established at Whenuapai in North West Auckland; and (e) the possible implications of the litigation claim under the Public Works Act 1981 from the Craigie Trust regarding 36.4 hectares of land acquired for aerodrome purposes during the 1970s and any other similar claims Other than as set out elsewhere in this Target Company Statement: (a) there are no known material changes in the financial or trading position or prospects of Auckland Airport since 30 June 2007; and (b) there is no other information about the assets, liabilities, profitability and financial affairs of Auckland Airport that could reasonably be expected to be material to the making of a decision by holders of Auckland Airport Shares to accept or reject the Offer. 19. Independent advice on merits of the Offer 19.1 Grant Samuel & Associates Limited is the Independent Adviser which has provided a report under Rule 21 of the Takeovers Code. A copy of the full report is included in Section 5 of this Target Company Statement. 20. Asset valuation 20.1 The report prepared by Grant Samuel & Associates Limited referred to in paragraph 19.1 above refers to an independent valuation report prepared for Auckland Airport by Seagar & Partners (Auckland) Limited ( Seagar & Partners ). This report was prepared for financial reporting purposes and is dated as at 30 June The valuation relates to 362 hectares of land owned by Auckland Airport and which is being held for future commercial and industrial development ( Development Land ).

23 18 Auckland International Airport Limited Target Company Statement 20.2 Seagar & Partners have assessed the value of the Development Land to be $262,344,000 plus GST Seagar & Partners valued the Development Land in accordance with the Property Institute of New Zealand s ( PINZ ) Professional Practice 2006 and Accounting Standard IAS 40. The basis of the valuation was market value assuming each property s highest and best use in accordance with Auckland Airport s land use plan as at 30 June The Development Land has been valued using the Direct Sales Comparison Approach, which is a comparative method and considers the sales of similar or substitute properties and related market data and establishes a value estimate by processes involving comparative analysis The key assumptions on which the valuation by Seagar & Partners is based are as follows: (a) The valuation of the Development Land has regard to Auckland Airport s land use plan as at 30 June (b) In the absence of separately surveyed titles for each land asset, Seagar & Partners have relied upon the land areas supplied by Auckland Airport for these assets. (c) The land parcels comprising the Development Land are subject to vacant possession or occupancy arrangements which can be terminated at short notice. (d) The land parcels comprising the Development Land receive (and will continue to receive) the benefit of frontage to existing roads and the availability of services in the ownership of Auckland Airport within Auckland Airport s boundaries. (e) The condition of the assets and general macro economic factors influencing value from the date of inspection of the Development Land in May 2007 until 30 June 2007 remained unchanged Copies of the valuation report undertaken by Seagar & Partners referred to in paragraph 20.1 above, are available for inspection at Auckland International Airport, Management and Executive Offices, First Floor, Jean Batten International Terminal Building. Copies of this valuation report will be sent to any holder of Auckland Airport Shares on request. Requests may be made to: Corporate Secretary Auckland International Airport Limited PO Box Auckland Airport Manukau 2150 NEW ZEALAND 21. Prospective financial information 21.1 The unaudited prospective financial information referred to in paragraph 18.3 above is based on the following principal assumptions: (a) international passenger growth of 4.0% in the year to 30 June 2008 compared to the year to 30 June 2007; (b) MCTOW (maximum certified take-off weight) growth of 1.9%; (c) 2.5% increase in landing charges from 1 September 2007; (d) retail income growth of 8.3% in the year to 30 June 2008 compared to year to 30 June 2007; (e) EBITDA margin for the year to 30 June 2008 of 77.6%. Further information in respect of the principal assumptions is set out in Appendix B of the report prepared by Grant Samuel & Associates Limited referred to in paragraph 19.1 above The report prepared by Grant Samuel & Associates Limited referred to in paragraph 19.1 above contains prospective financial information in relation to Auckland Airport. The principal assumptions on which the prospective financial information is based are set out in Grant Samuel & Associates Limited s report Other than the prospective financial information referred to in paragraphs 21.1 and 21.2 above, this Target Company Statement does not refer to any other prospective financial information about Auckland Airport. 22. Sales of unquoted equity securities under Offer 22.1 There are no unquoted equity securities that are the subject of the Offer. 23. Market prices of quoted equity securities under Offer 23.1 Auckland Airport Shares are quoted on NZSX and the Australian Securities Exchange ( ASX ) The closing price on each stock exchange on which Auckland Airport Shares are quoted: (a) on 13 December 2007, being the last practicable working day before the date on which this Target Company Statement is sent by Auckland Airport, were: Exchange Closing price NZSX NZ$2.80 ASX A$2.56 (b) on 15 November 2007, being the last day on which the relevant exchanges were open for business before the Notice Date, were: Exchange Closing price NZSX NZ$3.04 ASX A$ The highest and lowest closing market prices of Auckland Airport Shares on NZSX and ASX during the six months before the Notice Date were as follows: (a) highest closing market price was: Exchange Closing price NZSX NZ$3.41 on 23 July 2007 ASX A$3.13 on 24 July 2007 (b) lowest closing market price was: Exchange Closing price NZSX NZ$2.64 on 15 May 2007 ASX A$2.33 on 15 May The Auckland Airport Board declared a final dividend of 4.45 cents per Auckland Airport Share on 23 August The record date for the final dividend was 12 October 2007 and it was paid on 19 October Other than as set out in paragraph 23.4 above, Auckland Airport did not issue any equity securities or make any changes to any equity securities on issue or make any distributions which could have affected the market prices of Auckland Airport Shares referred to in this section During the six month period before the Notice Date a number of events occurred which could have affected the market prices referred to in this section 23. These events are summarised below. (a) On 18 June 2007, Auckland Airport announced that it had become aware of approaches made by CPPIB to certain shareholders to purchase their Auckland Airport Shares for $3.10 per share in advance of a possible intention to launch a takeover. Auckland Airport also announced that the Auckland Airport Board was in discussions with a number of parties, including CPPIB, regarding value enhancing opportunities including acquiring an ownership interest in Auckland Airport and supporting the strategic development of Auckland Airport.

24 Auckland International Airport Limited Target Company Statement 19 (b) On 23 July 2007, Auckland Airport announced that it had entered into a merger implementation agreement ( Merger Implementation Agreement ) in connection with a proposed transaction with DAE involving an amalgamation and the establishment of a new company, in which DAE would invest up to $2.6 billion and hold between 51% and 60% of the securities. The remaining securities would be held by former Auckland Airport shareholders. Under the proposal, Auckland Airport shareholders would have received value of up to $3.80 per Auckland Airport Share. (c) On 30 July 2007 Auckland Airport announced that it had received notice from Air New Zealand Limited of a claim regarding judicial review of the setting by Auckland Airport of its new airport prices, including the replacement of the airport development charge with a passenger service charge payable by the airlines. Auckland Airport categorically refuted the claim and stated that it would be strongly defended by Auckland Airport. The Air New Zealand group has subsequently withheld payment of the proposed increase in landing charges in respect of the months of September and October. The amount in question is approximately $70,000 per month. This is expected to continue until the outcome of judicial review is known. (d) On 31 August 2007, Auckland Airport announced that it had received a notice from DAE under the Merger Implementation Agreement claiming that legal proceedings filed by Air New Zealand Limited seeking judicial review of Auckland Airport s recent aeronautical pricing process constituted a Prescribed Occurrence under the Merger Implementation Agreement. DAE also claimed in that notice that Auckland Airport was in breach of its obligations under the Merger Implementation Agreement by not using its reasonable endeavours to ensure a successful outcome to the proposal. Auckland Airport disputed both claims made by DAE in its notice. (e) On 3 September 2007, Auckland Airport announced that it had become aware of an announcement by CPPIB that CPPIB intended to submit a proposal under which it would acquire a significant minority stake in Auckland Airport. (f) On 6 September 2007, Auckland Airport and DAE announced that they had agreed to terminate the Merger Implementation Agreement on a mutually acceptable basis. (g) Please refer to paragraphs 10.3 and 10.4 above for details about further announcements made by, or in respect of, CPPIB. 24. Other information 24.1 The information set out in paragraphs 24.2 to 24.5 below is considered by the Directors to be information that could reasonably be expected to be material to the making of a decision by the holders of Auckland Airport Shares to accept or reject the Offer Auckland Airport notes that its financial advisers, First NZ Capital Limited and Credit Suisse (Australia) Limited, advised the Auckland Airport Board: (a) they have seen the report prepared by Grant Samuel & Associates Limited referred to in paragraph 19.1 above and do not materially disagree with its conclusions; and (b) that given the above and based on discussions they have had with other potential acquirors of Auckland Airport, on balance, the Auckland Airport Board should recommend the Offer to shareholders, in the absence of a superior offer The Offeror is seeking approval under Rule 10 of the Takeovers Code to make the Offer for 39.53% of the voting rights in Auckland Airport not already held or controlled by the Offeror. This approval is required because the total percentage of voting rights in Auckland Airport that would be held or controlled by the Offeror after the Offer becomes unconditional (being 40%) is not greater than 50%. The Offer is conditional on the approval required under Rule 10 of the Takeovers Code being obtained. That approval will be obtained if Auckland Airport shareholders who approve the Offeror making the Offer hold more voting rights in Auckland Airport than are held by Auckland Airport shareholders who object to the Offeror making the Offer The Takeovers Panel has advised Auckland Airport that in its view only those Auckland Airport shareholders on the share register as at 7 December 2007, the record date for the Offer, (the Record Date ) should be able to vote to approve or object to the Offer in respect of Auckland Airport Shares held on the Record Date. Therefore, any person who becomes a shareholder after such date may not vote to approve or object to the Offer and shareholders on the share register on the Record Date cannot vote any Auckland Airport Shares acquired after the Record Date to approve or object to the Offer. If an Auckland Airport shareholder wishes to approve or object to the Offer they need to complete the Approval Form enclosed with the Offer Document in accordance with the instructions set out on that Approval Form. An Auckland Airport shareholder may submit the Approval Form even if that shareholder does not intend to accept the Offer or intends to sell any or all of that shareholder s Auckland Airport Shares before the Offer closes. Once the Approval Form is received it will be irrevocable Auckland Airport intends to pay a handling fee to brokers in connection with the Offer, with details to be advised to the NZSX and ASX. 25. Approval of Target Company Statement 25.1 The contents of this Target Company Statement have been approved by the Board of Directors of Auckland Airport. 26. Certificate 26.1 To the best of our knowledge and belief, after making proper enquiry, the information contained in or accompanying this Target Company Statement is, in all material respects, true and correct and not misleading, whether by omission of any information or otherwise, and includes all the information required to be disclosed by Auckland Airport under the Takeovers Code. Signatures Anthony N Frankham Director Donald W Huse Chief Executive Officer John A Brabazon Director Robert G Sinclair Chief Financial Officer

25 20 Auckland International Airport Limited Target Company Statement Schedule 1 Ownership of equity securities in Auckland Airport (paragraph 5.1) Name Designation of equity security Number of equity securities held or controlled Directors Anthony Frankham Ordinary Shares 144, Joan Withers Ordinary Shares 23, Lloyd Morrison 2 Ordinary Shares 92,589, Richard Didsbury 3 Ordinary Shares 23, Senior Officers Don Huse Options 2,000, Ordinary Shares 4 40, Tony Gollin 5 Ordinary Shares 20, Steve Reindler Ordinary Shares 63, Judy Nicholl, Robert Sinclair and Charles Spillane 6 Ordinary Shares 146, Associates of Directors and Senior Officers Christa Frankham 7 Ordinary Shares 47, Rebecca Frankham 8 Ordinary Shares 8, Persons holding or controlling 5% or more of any class of equity securities 9 New Zealand Central Securities Depository Limited 10 Ordinary Shares 453,826, Auckland City Council Ordinary Shares 155,766, Manukau City Council (through its wholly owned subsidiary, Manukau City Investments Limited) Ordinary Shares 122,747, Manukau City Investments Limited Ordinary Shares 122,747, H.R.L. Morrison & Co Group Limited 11 Ordinary Shares 92,589, UBS Nominees Pty Ltd and its related body corporates Ordinary Shares 74,006, New Zealand Superannuation Fund Nominees Limited as nominee of the Guardians of Ordinary Shares 72,296, New Zealand Superannuation 13 Don Huse Options 14 2,000, John Goulter Options , David Hansen Options , Margaret Peacocke Options 14 72, Percentage of class (%) 1 Notes: 1 Percentages are based on 1,222,237,639 ordinary shares and 3,360,000 options to purchase ordinary shares on issue and are calculated to two decimal places (except where this would have resulted in the relevant percentage being zero). Position in table stated as at 11 December Lloyd Morrison is the chairman of, and beneficial owner of shares in, H.R.L. Morrison & Co Group Limited which has a non-beneficial interest in 92,589,072 Auckland Airport Shares. Mr Morrison is also a director of Infratil Limited which is the beneficial owner of 40,071,336 of the Auckland Airport Shares in which H.R.L. Morrison & Co Group Limited has a non-beneficial interest. See Note 11 below for more information. 3 These Auckland Airport Shares are held by Richard Didsbury jointly with Peter Didsbury and Lorna Didsbury. 4 These Auckland Airport Shares are held by Don Huse jointly with Margie Huse. 5 These Auckland Airport Shares are held by Tony Gollin jointly with Fleur Gollin and Jeremy Carr. 6 Judy Nicholl, Robert Sinclair and Charles Spillane are trustees of the Auckland International Airport Limited Share Purchase Plan and jointly hold 146,144 Auckland Airport Shares in that capacity. 7 Christa Frankham is an associate of Anthony Frankham and holds 31,996 of these Auckland Airport Shares jointly with John Lusk. 8 Rebecca Frankham is an associate of Anthony Frankham. 9 Based on information disclosed in substantial security holder notices submitted to Auckland Airport and from the enquiries of Auckland Airport, being the only such information within the knowledge of Auckland Airport. 10 New Zealand Central Securities Depository Limited is a custodial depository service, which allows electronic trading of securities to its members. 11 Infratil Limited is the beneficial owner of 40,071,336 of the Auckland Airport Shares held or controlled by H.R.L. Morrison & Co Group Limited. The registered holder of these Auckland Airport Shares is either New Zealand Central Securities Depository Limited, Infratil Europe Limited or Infratil Investments Limited. Infratil Investments Limited and Infratil Europe Limited are wholly-owned subsidiaries of Infratil Limited and hold the relevant Auckland Airport Shares on behalf of Infratil Limited. The New Zealand Superannuation Fund is the beneficial owner of 52,517,736 Auckland Airport Shares that are held in a fund managed by Morrison & Co Funds Management Limited, a subsidiary of H.R.L. Morrison & Co Group Limited. 12 This number does not include any custodial positions held by UBS Nominees Pty Ltd and its related body corporates. This information is not known to Auckland Airport. 13 New Zealand Superannuation Fund Nominees Limited as nominee for the Guardians of New Zealand Superannuation holds or controls 72,296,627 Auckland Airport Shares, of which 52,517,736 of those Auckland Airport Shares are held in a fund managed by Morrison & Co Funds Management Limited, a subsidiary of H.R.L. Morrison & Co Group Limited, as referred to in Note 11 above. 14 The Auckland Airport Options held by Don Huse were issued on similar, but not identical terms, to the Auckland Airport Options issued to other employees of Auckland Airport and are therefore a different class of equity security. Schedule 2 Equity securities issued to Directors or Senior Officers or their associates and beneficial interests in equity securities obtained under any employee share scheme or other remuneration arrangement (paragraph 5.3) Name Description Designation of equity security Number of equity securities Charles Spillane Ordinary Shares issued on exercise of options Ordinary Shares 72,000 $2.18 Steve Reindler Ordinary Shares issued on exercise of options Ordinary Shares 259,200 $2.19 Issue price

26 Auckland International Airport Limited Target Company Statement 21 Schedule 3 Trading in Auckland Airport equity securities (paragraph 6) Part A: Equity securities acquired or disposed of by Directors and Senior Officers or their associates Name Description Designation of equity security Number of equity securities Date of transaction Disposal or acquisition Lloyd Morrison 1 Director Details set out in Part B of Schedule 3 (refer to trading by H.R.L. Morrison & Co Group Limited) Charles Spillane Senior Officer Ordinary Shares 72, November 2007 Disposal $3.07 Judy Nicholl, Robert Sinclair and Senior Officers Ordinary Shares 236, June 2007 Disposal Nil Charles Spillane 2 Judy Nicholl, Robert Sinclair and Charles Spillane Judy Nicholl, Robert Sinclair and Charles Spillane Judy Nicholl, Robert Sinclair and Charles Spillane Judy Nicholl, Robert Sinclair and Charles Spillane Senior Officers Ordinary Shares 1,820 3 July 2007 Disposal Nil Senior Officers Ordinary Shares 1,820 1 August 2007 Disposal Nil Senior Officers Ordinary Shares 1,820 1 August 2007 Disposal Nil Senior Officers Ordinary Shares 1, August 2007 Disposal Nil Consideration per equity security Notes: 1 Lloyd Morrison is the chairman of, and beneficial owner of shares in, H.R.L. Morrison & Co Group Limited which has a non-beneficial interest in 92,589,072 Auckland Airport Shares. 2 Judy Nicholl, Robert Sinclair and Charles Spillane are trustees of the Auckland International Airport Limited Share Purchase Plan. All transactions referred to in this table relate to the transfer by the trustees to participating employees in the plan either on completion of the plan or on retirement. 3 There were 130 separate transactions by the trustees referred to in Note 2 on 12 June 2007, each involving the transfer by the trustees of 1,820 Auckland Airport Shares. Part B: Name Weekly acquisitions or disposals of equity securities by persons holding 5% or more of any class of equity securities Equity securities acquired or disposed of in relevant week Designation of equity securities Weighted average consideration per equity security Disposal or acquisition Week commencing H.R.L. Morrison & Co Group Limited 1 2,031,000 Ordinary Shares $3.23 Acquisition 25 June 2007 H.R.L. Morrison & Co Group Limited 5,870,000 Ordinary Shares $3.28 Acquisition 2 July 2007 H.R.L. Morrison & Co Group Limited 15,572,564 Ordinary Shares $3.30 Acquisition 9 July 2007 H.R.L. Morrison & Co Group Limited 3,925,344 Ordinary Shares $3.29 Acquisition 16 July 2007 H.R.L. Morrison & Co Group Limited 1,460,000 2 Ordinary Shares $3.39 Acquisition 23 July 2007 H.R.L. Morrison & Co Group Limited 12,471,145 Ordinary Shares $3.30 Acquisition 30 July 2007 H.R.L. Morrison & Co Group Limited 4,884,762 Ordinary Shares $3.11 Acquisition 6 August 2007 H.R.L. Morrison & Co Group Limited 4,111,701 Ordinary Shares $3.08 Acquisition 13 August 2007 H.R.L. Morrison & Co Group Limited 4,763,803 2 Ordinary Shares $3.09 Acquisition 27 August 2007 H.R.L. Morrison & Co Group Limited 600,000 2 Ordinary Shares $3.10 Acquisition 10 September 2007 H.R.L. Morrison & Co Group Limited 1,000,000 2 Ordinary Shares $3.09 Acquisition 8 October 2007 H.R.L. Morrison & Co Group Limited 598,694 2 Ordinary Shares $3.02 Acquisition 15 October 2007 H.R.L. Morrison & Co Group Limited 1,749,688 2 Ordinary Shares $3.12 Acquisition 22 October 2007 H.R.L. Morrison & Co Group Limited 7,505,771 Ordinary Shares $2.90 Acquisition 29 October 2007 H.R.L. Morrison & Co Group Limited 5,425,000 Ordinary Shares $3.13 Acquisition 5 November 2007 H.R.L. Morrison & Co Group Limited 9,750,000 Ordinary Shares $3.00 Acquisition 12 November 2007 New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited 394,120 Ordinary Shares $2.70 Acquisition 11 June ,776 Ordinary Shares $3.33 Acquisition 18 June ,850 Ordinary Shares $3.25 Disposal 25 June ,950,500 Ordinary Shares $3.19 Acquisition 2 July ,451,282 Ordinary Shares $3.28 Acquisition 9 July ,480,672 Ordinary Shares $3.30 Acquisition 16 July ,420,439 Ordinary Shares $3.29 Acquisition 30 July ,849,554 Ordinary Shares $3.30 Acquisition 6 August ,055,850 Ordinary Shares $3.08 Acquisition 13 August ,129 Ordinary Shares $3.29 Acquisition 27 August ,078,910 Ordinary Shares $3.07 Acquisition 10 September ,124 Ordinary Shares $3.10 Acquisition 17 September 2007

27 22 Auckland International Airport Limited Target Company Statement Name New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited New Zealand Superannuation Fund Nominees Limited Equity securities acquired or disposed of in relevant week Designation of equity securities Weighted average consideration per equity security Disposal or acquisition Week commencing 2,724 Ordinary Shares $3.04 Disposal 24 September ,500 Ordinary Shares $3.25 Acquisition 1 October ,946 Ordinary Shares $3.15 Acquisition 8 October ,800 Ordinary Shares $3.09 Acquisition 15 October ,347 Ordinary Shares $3.03 Acquisition 22 October ,949 Ordinary Shares $3.11 Acquisition 29 October ,116,105 Ordinary Shares $2.89 Acquisition 5 November ,084,700 Ordinary Shares $3.13 Acquisition 12 November ,125,000 Ordinary Shares $3.00 Acquisition 19 November ,536,200 Ordinary Shares $3.00 Acquisition 26 November ,094,587 Ordinary Shares $2.94 Acquisition 3 December ,467 Ordinary Shares $2.89 Acquisition 10 December 2007 UBS Nominees Pty Limited and its 69,004 Ordinary Shares $2.54 Acquisition 11 June 2007 related body corporates 3 UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates 154,579 Ordinary Shares $3.20 Acquisition 18 June ,174 Ordinary Shares $3.07 Acquisition 25 June ,795 Ordinary Shares $3.24 Acquisition 2 July ,710,908 Ordinary Shares $3.29 Acquisition 9 July ,776 Ordinary Shares $3.20 Acquisition 16 July ,037,496 Ordinary Shares $3.36 Acquisition 23 July ,414 Ordinary Shares $3.30 Disposal 30 July ,800,230 Ordinary Shares $3.13 Acquisition 6 August ,977 Ordinary Shares $3.11 Acquisition 13 August ,149 Ordinary Shares $3.18 Acquisition 20 August ,300 Ordinary Shares $3.10 Acquisition 27 August ,799 Ordinary Shares $3.09 Acquisition 3 September ,724 Ordinary Shares $3.11 Disposal 10 September ,492 Ordinary Shares $3.12 Acquisition 17 September ,568,831 Ordinary Shares $3.16 Acquisition 24 September ,580 Ordinary Shares $3.16 Disposal 1 October ,070 Ordinary Shares $2.94 Acquisition 8 October ,245 Ordinary Shares $3.06 Disposal 15 October ,071 Ordinary Shares $3.09 Disposal 22 October ,297 Ordinary Shares $2.86 Acquisition 29 October ,014 Ordinary Shares $2.85 Acquisition 5 November ,172 Ordinary Shares $3.01 Acquisition 12 November ,199,664 Ordinary Shares $2.95 Acquisition 19 November 2007

28 Auckland International Airport Limited Target Company Statement 23 Name UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates UBS Nominees Pty Limited and its related body corporates Equity securities acquired or disposed of in relevant week Designation of equity securities Weighted average consideration per equity security Disposal or acquisition Week commencing 3,889,209 Ordinary Shares $2.93 Acquisition 26 November ,296 Ordinary Shares $2.80 Acquisition 3 December ,012 Ordinary Shares $2.83 Disposal 10 December 2007 New Zealand Central Securities 488,043 Ordinary Shares Not disclosed Acquisition 11 June 2007 Depository Limited 4 New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited New Zealand Central Securities Depository Limited 3,177,296 Ordinary Shares Not disclosed Acquisition 18 June ,374,330 Ordinary Shares Not disclosed Acquisition 25 June ,552,398 Ordinary Shares Not disclosed Acquisition 2 July ,222,524 Ordinary Shares Not disclosed Acquisition 9 July ,546,431 Ordinary Shares Not disclosed Acquisition 16 July ,429,441 Ordinary Shares Not disclosed Acquisition 23 July ,066,026 Ordinary Shares Not disclosed Acquisition 30 July ,416,715 Ordinary Shares Not disclosed Acquisition 6 August ,467,614 Ordinary Shares Not disclosed Acquisition 13 August ,352,492 Ordinary Shares Not disclosed Disposal 20 August ,421,620 Ordinary Shares Not disclosed Acquisition 27 August ,474,523 Ordinary Shares Not disclosed Acquisition 3 September ,677,907 Ordinary Shares Not disclosed Acquisition 10 September ,418,252 Ordinary Shares Not disclosed Acquisition 17 September ,505,203 Ordinary Shares Not disclosed Acquisition 24 September ,249,458 Ordinary Shares Not disclosed Acquisition 1 October ,512,640 Ordinary Shares Not disclosed Acquisition 8 October ,078,923 Ordinary Shares Not disclosed Acquisition 15 October ,433,488 Ordinary Shares Not disclosed Disposal 22 October ,222,437 Ordinary Shares Not disclosed Disposal 29 October ,945,815 Ordinary Shares Not disclosed Acquisition 5 November ,286 Ordinary Shares Not disclosed Acquisition 12 November ,060,446 Ordinary Shares Not disclosed Acquisition 19 November ,566,449 Ordinary Shares Not disclosed Acquisition 26 November ,662,603 Ordinary Shares Not disclosed Acquisition 3 December ,475,057 Ordinary Shares Not disclosed Acquisition 10 December 2007 David Hansen 230,400 5 Ordinary Shares $3.06 Disposal 29 October 2007 Notes: 1 This table includes all trades involving Auckland Airport Shares held or controlled by H.R.L. Morrison & Co Group Limited. As noted in Note 11 of Schedule 1 to Section 4 of this Target Company Statement, this includes Auckland Airport Shares beneficially owned by Infratil Limited and New Zealand Superannuation Fund Nominees Limited. 2 This is a single transaction in the relevant week. 3 This table includes the acquisition and disposal of Auckland Airport Shares by UBS Nominees Pty Limited and its related body corporates and is based on the response to enquiries made of UBS. Certain acquisitions and disposals by UBS Nominees Pty Limited and its related body corporates were in Australian dollars. For the purposes of calculating the weighted average consideration per equity security as set out in the table, Australian dollar amounts were converted to New Zealand dollar amounts using the exchange rate as at close of trading on the applicable day. 4 The majority of transactions carried out by New Zealand Central Securities Depository Limited in the relevant period did not involve the payment of consideration. 5 This is a single transaction carried out on behalf of David Hansen on 1 November 2007.

29 24 Auckland International Airport Limited Target Company Statement Section 5: Independent Adviser s Report

30 Auckland International Airport Limited Independent Adviser s Report On the Takeover Offer from Canada Pension Plan Investment Board December 2007

31 Table of Contents 1. Terms of the CPP Proposal Background Overview of the CPP Offer Requirements of the Takeovers Code Profile of CPP Scope of the Report Purpose of the Report Basis of Evaluation Evaluation of the Merits of the CPP Offer Catalyst for the CPP Offer The Value of the CPP Offer Framework of the CPP Offer Implications for AIA Shareholders if the CPP Offer is Successful Other Merits of the CPP Offer The Subsequent Proposed Amalgamation Summary Acceptance or Rejection of the CPP Offer Airport Industry Overview General Characteristics Sources of Revenue Airport Ownership Capital Structure of Airports Airport Regulation Profile of Auckland Airport Background Aeronautical Revenue Non-aeronautical Revenue Airline Development Subsidiaries and Associate Companies Growth Strategy Financial Profile Financial Position Cash Flow Capital Structure and Ownership Share Price Performance Valuation of AIA Summary Methodology DCF Analysis Earnings Multiples Analysis Assessment of Implied Multiples Qualifications, Declarations & Consents Qualifications Limitations and Reliance on Information Disclaimers Independence Information Declarations Consents APPENDIX A Regulatory Framework APPENDIX B Discounted Cash Flow Assumptions APPENDIX C Comparable Listed Companies APPENDIX D Recent Transaction Evidence

32 AIA has been a strongly performing company for shareholders since it was listed in It is an attractive infrastructure asset with projected long term incremental growth; Canada Pension Plan Investment Board (CPP) owns 0.8% of the issued shares in Auckland International Airport (AIA). CPP wishes to make an offer at $ per share to acquire a further 39.2% of the issued shares in AIA (representing 39.53% of the shares in AIA it does not already own). CPP can only make the Offer if the prior approval of AIA shareholders is obtained, which will require the favourable endorsement of 50% or more of the votes cast in respect of that resolution. That approval will be obtained if AIA shareholders who approve CPP making the Offer hold more voting rights in AIA than are held by shareholders who object to it; the decision to vote for or against CPP acquiring 40% of AIA is separate from the decision to accept the CPP Offer; the CPP Offer (if approved to be made) must remain open for 90 days. CPP must release acceptance levels to the market during that period; the CPP Offer provides for an acceptance facility under which AIA shareholders can withdraw an acceptance to the CPP Offer any time up until CPP receives sufficient acceptances to take its total shareholding in AIA to 40%. This option provides more flexibility to accepting shareholders; if shareholders approve CPP acquiring 40% of AIA the CPP Offer has only two outcomes either CPP will own 40% of AIA or it will buy no further shares over what it already owns (0.8%); if the CPP Offer is unsuccessful, CPP will acquire none of the shares accepted into the CPP Offer; the price being offered by CPP is above Grant Samuel s valuation range for AIA of $ $3.48 per share. The earnings multiples implied by the CPP Offer price also compare favourably with the multiples implied by the transactions involving airport companies and the market price of comparable listed airport companies; in Grant Samuel s opinion CPP is paying a control premium for the shares in AIA it wishes to acquire. The control premium is unlikely to be achieved on the balance of the shares as the CPP Offer is limited to 40%; in Grant Samuel s opinion CPP will not gain control of AIA by virtue of the voting restrictions on CPP and the relationship Deed it proposes to enter into with AIA. CPP will however be in a position of strong influence over AIA and its future direction; if the CPP Offer is successful it is likely that the majority of shareholders accepting the CPP Offer will be able to sell most of the shares they have accepted into the CPP Offer. Nevertheless accepting shareholders will almost certainly not be able to sell all their shares into the CPP Offer, as acceptances in excess of 39.53% will be scaled down; shareholders could potentially accept the CPP Offer in respect of some or all of their shares and if the CPP Offer is successful they could buy back AIA shares at potentially a lower price after the CPP Offer closes; if the CPP Offer is successful and it receives a favourable binding tax ruling from the Inland Revenue Department, CPP is expected to present an amalgamation proposal to AIA shareholders in 2009, subject to receiving AIA Board approval. The proposed amalgamation will incorporate increased distributions which will be more tax efficient to non tax paying shareholders and foreign investors including CPP; and if the proposed amalgamation is implemented, the convertible notes created by the proposed capital restructuring will be able to be redeemed free of tax, effectively a tax free return of capital which cannot be achieved under the existing capital structure. 3

33 Glossary ACC Auckland City Council AIA Auckland International Airport Limited AIL Approved Issuer Levy CPP Canada Pension Plan Investment Board CPP Offer CPP s partial takeover offer of $ to take its ownership in AIA to 40% DAE Dubai Aerospace Enterprise DCF Discounted Cash Flow EBIT Earnings Before Interest and Tax EBITA Earnings Before Interest, Tax and Amortisation EBITDA Earnings Before Interest, Tax, Depreciation and Amortisation FTE Full Time Employees Grant Samuel Grant Samuel & Associates Limited LCC Low Cost Carriers MCC Manukau City Council MCTOW Maximum Certified Take Off Weight MED Ministry of Economic Development NPAT Net Profit After Tax NPBT Net Profit Before Tax NPV Net Present Value OIO Overseas Investment Office OTPP Ontario Teachers Pension Plan PC Price Cap PE Multiple Price Earnings Multiple PSC Passenger Service Charge ROR Rate of Return TRL Transport Research Laboratory TSC Terminal Service Charge WACC Weighted Average Cost of Capital 4

34 1. Terms of the CPP Proposal 1.1 Background On 18 June 2007 the Directors of Auckland International Airport Limited (AIA or the company) announced that they were in discussions with selected parties regarding capital restructuring opportunities including the potential acquisition of an ownership interest in AIA. The Canada Pension Plan Investment Board (CPP) was identified in the announcement as one of the interested parties. On 23 July 2007 the Directors of AIA announced a proposed transaction with Dubai Aerospace Enterprise (DAE) whereby DAE would invest up to $2.6 billion in AIA and hold between 51% and 60% of the restructured company s shares. Negotiations regarding the proposed transaction with DAE were terminated on 6 September after DAE and AIA were unable to agree to continue with the proposed transaction. On 19 September 2007 CPP announced its intention to submit a proposal to AIA under which it would acquire a significant stake in AIA (the CPP Amalgamation Proposal). This proposal was subsequently submitted to the Directors of AIA on 21 September 2007 in the form of a discussion paper. On 31 October 2007 AIA announced that it had ended discussions with CPP following an AIA Board vote. The AIA Board considered that the CPP Amalgamation Proposal contained a number of risks including: the transaction would have resulted in a significant increase in the level of debt held by the company; that all or most shareholders would retain an ongoing interest in the company as the amalgamation proposal did not contain a full cash option for shareholders; and CPP offered no specific airport experience to AIA. The DAE and CPP proposals were the outcome of a process whereby potentially interested parties were invited to submit expressions of interest to acquire some or all of AIA. A limited number of parties were given access to additional data to conduct due diligence. On the 7 November 2007 CPP gave notice of intention to make a partial takeover offer (the CPP Offer) at $ to take its shareholding in AIA to 40%. The CPP Offer will open on 14 December 2007 and will require the support of AIA shareholders to proceed. If the requisite shareholder approval is not forthcoming, the CPP Offer will not proceed and any acceptances will be invalid. If CPP is successful in achieving a 40% 1 shareholding it intends to present an amalgamation proposal to shareholders in It is important to note that unlike earlier proposals by both DAE and CPP which had the capital restructuring as an integral component, the CPP Offer is a standalone offer for 39.53% of the shares in AIA that it does not own (representing 39.22% of the total issued shares in AIA). The capital restructuring to be implemented by way of a proposed amalgamation is a separate transaction which will require shareholders of AIA (excluding CPP) to approve it by way of an ordinary resolution at a later date. By accepting the CPP Offer for some or all of their shares and voting in favour of CPP acquiring 40%, shareholders are not sanctioning any form of capital restructuring which may or may not be subsequently placed before shareholders. As the CPP Offer is not conditional on a capital restructuring, CPP is clearly willing to be a 40% shareholder under the current capital structure, whether the subsequent capital restructuring eventuates or not. Accordingly, support for the CPP Offer does not necessarily imply support for the capital restructuring. 1 CPP wishes to take its ownership in AIA to 40% from its current level of 0.78%. However, due to the possibility of AIA Executives exercising options during the Offer Period (resulting in a dilution of CPP s existing shareholding), the Takeovers Panel has approved an exemption to certain rules of the Takeovers Code to allow the CPP Offer to proceed in the event that shareholder acceptances of the Offer, when taken together with CPP s existing shareholding, result in CPP owning only 39.99% rather than 40%. For the purposes of this report Grant Samuel refers to this percentage as 40% to avoid confusion. 5

35 1.2 Overview of the CPP Offer The CPP Offer will be made on 14 December 2007 and will incorporate the approval to consider whether or not AIA shareholders approve CPP becoming the holder of 40% of the shares in the company. The Offer is $ per share for 39.53% of the shares in AIA that CPP does not already own. The Offer is conditional upon, inter alia: Overseas Investment Office (OIO) approval to the transaction being received; the 40% shareholding level being achieved; and the approval of the majority of AIA shares voted for CPP securing the 40% shareholding. CPP will not be able to vote in relation to the approval. Grant Samuel expect that AIA will continually inform the market as to the status of the vote to consider whether CPP is permitted to become the holder of 40% of the shares in AIA. The CPP Offer will be open for 90 days until 12 March 2008, and is not able to be extended. However, under the provisions of the Takeovers Code CPP will have a further 30 days following 12 March 2008 in which to satisfy the OIO approval condition. If OIO approval is not obtained within the 30 days following 12 March 2008 (even if all other conditions have been satisfied) the Offer will lapse. Shareholders electing to accept the CPP Offer in respect of some or all of their AIA shares can do so by signing the standard acceptance green form or the blue form which allows the shareholder to withdraw the acceptance any time prior to CPP receiving acceptances in relation to 39.53% of the shares in AIA it does not already own. The standard acceptance form cannot be withdrawn. 1.3 Requirements of the Takeovers Code The Takeovers Code came into effect on 1 July 2001, replacing the New Zealand Stock Exchange Listing Rules and the Companies Amendment Act 1963 requirements governing the conduct of company takeover activity in New Zealand. The Takeovers Code seeks to ensure that all shareholders are treated equally and on the basis of proper disclosure are able to make informed decisions on shareholding transactions that may impact on their own holdings. The fundamental rule of the Takeovers Code is that a person who holds or controls 20% or more of the voting rights in a code company may not become the holder or controller of an increased percentage of the voting rights in the code company. Rule 7 of the Takeovers Code sets out the exceptions to the fundamental rule. Rule 7 states that a person may become the holder or controller of an increased percentage of the voting rights in a code company under the following circumstances: by an acquisition under a full offer; by an acquisition under a partial offer; by an acquisition by the person of voting securities in the code company or in any other body corporate from one or more other persons if the acquisition has been approved by an ordinary resolution of the code company in accordance with the code; by an allotment to the person of voting securities in the code company or in any other body corporate if the allotment has been approved by an ordinary resolution of the code company in accordance with the code, if: (i) the person holds or controls more than 50%, but less than 90%, of the voting rights in the code company; and 6

36 (ii) the resulting percentage held by the person does not exceed by more than 5 the lowest percentage of the total voting rights in the code company held or controlled by the person in the 12-month period ending on, and inclusive of, the date of the increase; if the person already holds or controls 90% or more of the voting rights in the code company. CPP is required to obtain the approval of shareholders to the Offer. The procedure to be followed by CPP is governed by Rule 10 which states: the takeover notice and the offer must include a statement that approval is sought under rule 10 of the Takeovers Code and that the offer is conditional on approval being obtained; the Offer must be accompanied by a separate approval document providing for the offeree to approve or object to the offeror making an offer for 50% or less of the voting rights in the target company; and approval under this rule is obtained if the offerees so approving hold more voting rights in the target company than are held by offerees so objecting. Shareholders will receive both an offer document offering to acquire 39.53% of the issued shares of AIA that CPP does not already own and a separate approval form to approve CPP becoming a 40% shareholder. A shareholder may elect not to sell some or all of their shares but separately support CPP becoming the holder of 40% of the shares in AIA or vice versa. The decision to sell and the approval on CPP becoming a 40% shareholder are not linked, but CPP will only be able to acquire shares if a majority of shares voted in respect of the resolution support the acquisition. 1.4 Profile of CPP CPP is a Toronto based organisation responsible for investing the Canada Pension Plan Fund in a way that maximises returns without undue risk of loss. The CPP Fund is C$120.5 billion (approximately NZ$165 billion), and was incorporated as a federal crown corporation by an act of parliament in December 1997 and made its first investment in March The CPP operates at arms length from the Canadian government and is subject to accountability requirements set out in its legislation. The composition of the Canada Pension Plan Fund as at 30 June 2007 is set out below: 7

37 Composition of the Canada Pension Plan Fund Private Equity 7% Infrastructure 2% Bonds 25% Public equities 57% Inflation Linked Bonds 3% Real estate 5% Money market securities 1% Source: CPP The investment in AIA, if it eventuates, will constitute an infrastructure investment by CPP. CPP states that it is an active investor in global infrastructure assets and continues to seek investments in transportation assets (airports, ports, toll roads) as well as assets involved in the distribution and transmission of electricity, water or gas. CPP s existing infrastructure investments include: CPP Infrastructure Investments Entry name Entry type Date of Investment Investment Wales & West Utilities UK Gas distribution June m for 17% Transelec (Chile) Electricity transmission June 2006 US$355m for 27% AWG UK water and sewage utility December m for 32% Based on current contribution rates and expected investment returns, the Chief Actuary of Canada has stated the CPP fund is expected to grow to approximately C$250 billion within 10 years. In order to build a diversified portfolio of investments, CPP is currently investing in publicly traded stocks, private equities, real estate, inflation linked bonds, infrastructure and fixed income securities. 8

38 2. Scope of the Report 2.1 Purpose of the Report The CPP Offer will require prior approval of shareholders pursuant to Rule 10 of the Takeovers Code to proceed. The Directors of AIA have engaged Grant Samuel & Associates Limited (Grant Samuel) to prepare an Independent Adviser s Report to comply with the Takeovers Code in respect of the CPP Offer. Grant Samuel is independent of AIA and CPP and has no involvement with, or interest in, the outcome of the Offer. Rule 21 of the Takeovers Code requires the Independent Adviser to report on the merits of an offer. The term merits has no definition either in the Takeovers Code itself or in any statute dealing with securities or commercial law in New Zealand. While the Takeovers Code does not prescribe a meaning of the term merit, it suggests that merits include both positives and negatives in respect of a transaction. A copy of the report will accompany the Target Company statement to be sent to all AIA shareholders. This report is for the benefit of the shareholders of AIA other than CPP. The report should not be used for any purpose other than as an expression of Grant Samuel s opinion as to the merits of the Offer. 2.2 Basis of Evaluation Grant Samuel has evaluated the Proposed Transaction by reviewing the following factors: the estimated value range of AIA and the price of the Offer when compared to that estimated value range; the likelihood of an alternative offer and alternative transactions that could realise fair value; the likely market price and liquidity of AIA shares in the absence of the Offer; any advantages or disadvantages for AIA shareholders of accepting or rejecting the Offer; the current trading conditions for AIA; the timing and circumstances surrounding the Offer; the attractions of AIA s business; and the risks of AIA s business. Grant Samuel s opinion is to be considered as a whole. Selecting portions of the analyses or factors considered by it, without considering all the factors and analyses together, could create a misleading view of the process underlying the opinion. The preparation of an opinion is a complex process and is not necessarily susceptible to partial analysis or summary. 9

39 3. Evaluation of the Merits of the CPP Offer 3.1 Catalyst for the CPP Offer The Proposed Transaction can be regarded as an outcome of a series of initiatives put in place by the Board and Management of AIA. In 2005 the Board and Management of AIA formed the view that the capital structure of AIA was not optimal for two key reasons: as an infrastructure asset AIA typically produces strong and stable cash flows. Accordingly its debt capacity, even using conservative and prudent assumptions, is significantly greater than the level of debt the company is currently holding. If more debt could be raised, a capital return to shareholders could be contemplated; the practical impediment to simply increasing the debt now is that the company has insufficient available subscribed capital to be able to pay a tax free return of capital to shareholders. In short, while debt could readily be increased, the business does not need significant levels of additional cash for its capital expenditure programme and cannot make a tax efficient distribution to shareholders. A capital structure review was commenced in April 2005, and as part of that review the company announced in June 2005 a $147 million special dividend and an on-market share buy back. The company also increased its ordinary dividend payout ratio. As a result of this capital structure review, Standard & Poor s lowered AIA s credit rating to A Stable. The well publicised capital structure review highlighted to potential suitors the opportunity that an investment in AIA presented. On 18 June 2007 AIA announced that it was in discussions with a number of parties, including CPP regarding value enhancing opportunities including acquiring an ownership interest in AIA and supporting the strategic development of AIA. The announcement included a general don t sell recommendation. Since the date of that announcement AIA has progressed a number of approaches from international and local parties interested in acquiring some form of ownership in the company. Most of these approaches involved the desire by the interested parties to secure majority ownership of the company. In part due to the prices being contemplated by some of the interested parties and the recognised difficulties in securing the support of the two large Auckland City Council (ACC) and Manukau City Council (MCC) shareholders, a number of approaches failed to gather any momentum. It was, however, envisaged that such a process may ultimately yield firm proposals from suitable cornerstone shareholders that could potentially also facilitate the implementation of a more desirable capital structure. AIA subsequently entered into serious discussions with DAE and CPP, both of whom conducted due diligence on the company. The earlier DAE Proposal and the original CPP Amalgamation Proposal both hinged on a capital restructuring to be effected via an amalgamation, a mechanism designed to allow the surviving airport entity to pay out a higher yield than the company had previously been able to achieve (due to the practical constraints surrounding its capital structure). Both the DAE and CPP Amalgamation Proposals involved the acquisition of a majority shareholding in the company, (51% - 60% in the case of DAE, and 40% - 49% in the case of CPP). DAE withdrew its Proposal on 6 September 2007 and the CPP Proposal was effectively terminated on 31 October 2007 after the AIA Board voted to discontinue discussions with CPP. The AIA Board considered that the CPP Amalgamation Proposal would have significantly increased the risks faced by the company and that these risks would have outweighed the potential benefits associated with the proposal. The risks identified by the AIA Board included: 10

40 an increase in the level of debt that the company would have carried over the long term; that all or most shareholders would retain an ongoing interest in the company as the CPP Amalgamation Proposal contained no full cash option for all shareholders, and importantly, that CPP offered no specific airport experience to AIA. The announcement that the CPP Amalgamation Proposal was not to be put to shareholders received a mixed reaction. Certain shareholders, including ACC, were vocal in their view that the CPP Amalgamation Proposal should have been put to AIA shareholders to decide. Other shareholders subsequently advised the Board that they would not have accepted the CPP Amalgamation Proposal had it been put to shareholders. Shortly after the decision to abandon the CPP Amalgamation Proposal MCC voted unanimously to retain its shareholding and indicated a preference to see no single controlling shareholder own more that 30 35% of AIA. Given this mixed sentiment, the likely outcome of the CPP Amalgamation Proposal, had it been put to shareholders, would have been difficult to predict. The AIA Board s decision not to put the CPP Amalgamation Proposal to shareholders placed CPP in a predicament. It could either abandon or shelve the Amalgamation Proposal or seek to achieve its desired outcome under a different framework. The announcement by CPP on 7 November 2007 that it intended to launch a takeover offer for AIA signalled its desire to reconstruct the two key elements of the CPP Amalgamation Proposal through a sequential takeover/amalgamation process. If the CPP Offer is successful, then the proposed amalgamation will be separately put to shareholders for their consideration in 2009 only if a favourable binding tax ruling has been received. If the CPP Offer is not successful, the proposed amalgamation will not be put to shareholders. CPP has had to alter the mechanism to achieve its stated goal as a result of the AIA board decision. CPP s interest in AIA emanated in part from publicly announced initiatives of the AIA Board and management to address the company s capital structure. 3.2 The Value of the CPP Offer The value of the CPP Offer can be benchmarked against a range of parameters: Grant Samuel s assessment of the full underlying value of the shares. In Grant Samuel s opinion the full underlying value of AIA shares is in the range of $3.07 to $3.48 per share as set out in Section 6. The full underlying value is the price a person or entity would be expected to pay to acquire the company as a whole and accordingly includes a premium for control. The full underlying value per share is the full underlying value of the company divided by the number of shares on issue. In Grant Samuel s opinion the price offered should be equivalent to the full underlying value of the company because by securing 40% is significantly reducing the probability that another party may be willing or able to seek to acquire 100% of the company. If the CPP Offer is successful the opportunity for AIA shareholders to receive a control premium for their remaining shares is substantially removed (unless CPP made a further takeover offer for more shares in AIA). The CPP Offer of $ per share is above the top end of Grant Samuel s assessed value range for AIA shares; the premium implied by the Offer. The CPP Offer represents a premium of approximately 26% relative to the closing price of $2.91 per share on 6 November 2007, being the day prior to CPP s takeover offer. The premium for control is consistent with the premiums for control generally observed in successful takeovers of other listed companies. It must be recognised that the AIA share price had increased substantially in 2007 as a result of AIA announcing that it was in discussions concerning a review of its capital structure and both the DAE and CPP merger proposals being announced. Both these proposed transactions, although abandoned, at the time of their announcement contributed to an increase in the AIA share price; and comparable company and comparable transaction data. The CPP Offer implies multiples of 20.5 times historical EBITDA and 19 times consensus forecast EBITDA for Grant Samuel s 11

41 analysis suggests these multiples are broadly in line with multiples paid for similar size shareholdings in airport companies. The CPP Offer price is above Grant Samuel s assessment of the full underlying value of AIA. The multiples of earnings implied by the CPP Offer price compare favourably with the earnings multiples implied by recent transactions in the airport sector and the share prices of other listed international airports. 3.3 Framework of the CPP Offer The CPP Offer is a partial takeover offer to acquire issued shares in AIA to take CPP s total shareholding to 40%. The nature of a partial offer has a number of implications for shareholders: without the prior approval of non-related shareholders CPP cannot own a shareholding in AIA of between 20% and 50% as required by rule 10 of the Code. CPP is seeking that approval from AIA shareholders simultaneous with the Offer being made. If CPP is not successful in securing the approval of shareholders then it cannot proceed with the CPP Offer; in the event CPP does not receive acceptances sufficient to take its shareholding up to 40% of the shares in AIA, then CPP will not be able to purchase any shares under the CPP Offer; there is no certainty what proportion of their own shares an accepting shareholders will be able to sell if the CPP Offer is successful. CPP is seeking to acquire a further 39.2% of the AIA shares on issue. Given that MCC has unanimously voted to retain its shareholding in AIA and ACC is expected to adopt a similar stance, CPP will require acceptances of broadly half the remaining shares on issue to be successful. In the unlikely event all AIA shareholders other than the Councils accepted the CPP Offer, CPP could only purchase 51% of the shares held by each AIA shareholder. The greater the level of acceptance, the lower the number of shares accepting shareholders will be able to sell into the Offer. Indeed if the CPP Offer is successful at any level, AIA shareholders who accepted the Offer in respect of their entire shareholding will not be able to sell all their shares into the Offer as excess acceptances must be scaled back. If the CPP Offer is successful, shareholders accepting 39.53% or less of their shares into the Offer will not be subject to any scaling. Some institutional shareholders managing index funds may not accept the CPP Offer but are likely to support CPP becoming a cornerstone shareholder and implementing the proposed subsequent capital restructuring. It is not possible to estimate the likely level of acceptances but Grant Samuel would be surprised if more than 50% - 60% of the total shares on issue (and possibly substantially less) were accepted into the CPP Offer. A strategy which has some merit would be to accept the CPP Offer of $ per share and then buy back a shareholding on market after the CPP Offer closes as it is reasonable, in the short term at least, to expect the AIA share price to fall back to trade in line with multiples implied by the majority of other airport shares; approximately 64% of the issued shares in AIA are owned by the top 20 shareholders or custodians (including ACC and MCC). The support or otherwise of the larger shareholders in relation to the CPP Offer may be instrumental in determining whether CPP achieves the 40% unconditional threshold; if CPP is successful in acquiring a 40% shareholding it is still not able to ensure the capital restructuring will take place; and shareholders expecting the capital restructuring to be implemented and choosing to hold their shares may find that because CPP holds 40% of the shares the control premium (which could only be unlocked if CPP chose to sell) is no longer available and the market price of the AIA shares has fallen significantly. If the CPP Offer is successful, the value of each individual s shareholding (being the sum of proceeds received from the sale of shares to CPP and the market value of shares retained) could vary greatly as there is a range of acceptance levels for the CPP Offer and a range of prices for AIA shares after the CPP 12

42 Offer closes. The table below sets out a range of acceptance levels to the CPP Offer and a range of prices that AIA may trade at following completion of the Offer assuming a shareholder accepts all of their shares into the Offer. The analysis also assumes that the ACC and MCC do not accept the CPP Offer, meaning that a maximum of 76.5% of the issued shares in AIA could be sold into the CPP Offer (excluding the 0.8% of AIA CPP already owns). The value of 1,000 shares in AIA is shown in each scenario: Outcomes of the CPP Offer % of available shares accepting 100% 90% 80% 70% 60% 50% Acceptances 76.5% 68.8% 61.2% 53.5% 45.9% 38.2% Acceptance threshold achieved Yes Yes Yes Yes Yes No Shares sold into Offer Shares not sold into the Offer ,000 Consideration $1,874 $2,083 $2,343 $2,678 $3,124 $ - Sum of consideration and value retained at a range of post Offer share prices Post-Offer share price: $2.60 $3,141 $3,201 $3,276 $3,373 $3,502 $2,600 $2.80 $3,239 $3,287 $3,348 $3,427 $3,531 $2,800 $3.00 $3,336 $3,373 $3,420 $3,480 $3,560 $3,000 $3.20 $3,434 $3,459 $3,492 $3,534 $3,589 $3,200 $3.40 $3,531 $3,546 $3,564 $3,587 $3,618 $3,400 The table identifies that there are a multitude of outcomes to the CPP Offer, each which delivers different value outcomes to the shareholder. As the CPP Offer is a partial offer there is no certainty what proportion of each accepting shareholder s shares in AIA will be bought if the Offer is successful. If the Offer is successful and assuming that neither ACC nor MCC accept the Offer in respect of their shares, accepting shareholders could end up selling between 51% and 100% of the shares they accept into the Offer. Given that excess acceptances will be scaled down, it is almost certain that if the offer is successful that accepting shareholders will not be able to sell all their shares into the Offer. This lack of clarity is problematic for communications with shareholders but is in line with the rules of the Takeover Code. If the Offer is unsuccessful in achieving at least 40%, no shares will be bought from accepting shareholders. 3.4 Implications for AIA Shareholders if the CPP Offer is Successful If the CPP Offer is successful then AIA will remain a listed company with CPP as a cornerstone shareholder. In that circumstance it is almost certain that all existing shareholders in AIA, even if they have accepted all their shares into the CPP Offer, will still hold shares in AIA (albeit with smaller shareholdings in the case of accepting shareholders). In these circumstances: it is generally accepted that a shareholding of around 40% or greater in a widely held public listed company such as AIA would give that holder control. However, CPP is restricted by Canadian law from voting more than 30% of the shares available to vote on resolutions to elect or remove directors regardless of its shareholding. CPP would in fact not be able to vote the maximum 30% as the 10% which is not eligible to be voted reduces the number of shares available for voting 2. This means that CPP will only be able to vote 25.7% of the shares in AIA if the Offer is successful. The 25.7% shareholding represents 30% of the non-excluded shares. This restriction means that CPP will not have control of AIA. The sum of the two Councils current shareholdings (which could be 2 That is, if 10% of the shares were not able to be voted, only 90% of the shares would be available for voting and a 30% shareholding would result in an actual vote of 30/90 or 33.33% which would contravene the Canadian law limit of 30%. The proportion of shares able to be voted by CPP can be determined by the following formula: (40 χ) / (100 - χ) = 30% where χ is the percentage of shares which CPP cannot vote. The resulting percentage of shares in AIA which CPP may not vote under Canadian law is 14.3%. 13

43 consolidated into a single shareholding by 2010 as a result of the Councils being merged into a single greater Auckland Council) totals 22.7% on a fully diluted basis. As CPP would be restricted from voting all its shares, the Council shareholding of 22.7% implies a voting control of approximately 26.5% of the available shares (assuming neither Council sold any shares into the CPP Offer). In addition to not being able to vote all of its shares CPP is proposing entering into a Deed with AIA in which CPP will undertake to maintain the voting restriction for all time unless approved by the other shareholders by way of an ordinary resolution; CPP will seek to appoint three new directors to the board of AIA. One of these will be a CPP Executive, another a person with international aeronautical/airport experience and the third a new independent Director. As a result the AIA Board will be increased to 10 members. CPP will not have a majority on the board and because of its constitution can only vote approximately 25.7% of the capital on resolutions regarding the appointment of directors. Historically the Councils have not achieved board representation. However, both Councils have secured new directors following their appointment at the AGM of AIA on 20 November ACC has nominated an independent person. MCC s nominee was, until his nomination, Chairman of Manukau City Investments Limited, the investment arm of MCC and holder of the shares in AIA. The appointment of two Council nominees together with up to three Directors from CPP will increase the size of the Board to 10 which is large, potentially unwieldy and runs counter to a general trend towards smaller boards; the CPP Offer allows both ACC and MCC to retain exactly the same ownership and voting rights as at present, if they choose to do so. Their collective power, assuming they held similar views, will be significantly negated by CPP acquiring a 40% shareholding. To date neither ACC nor MCC appear to have exercised any direct influence over AIA. Their nominated directors will have only two votes on an expanded board of up to ten and in any event must act in the best interest of AIA and not the Councils which nominated them; the liquidity of AIA shares is likely to be adversely affected. The size of the total public pool of shareholders will reduce and as a result there would be expected to be a lower level of trading in AIA shares; AIA will secure a financially strong long term cornerstone shareholder. At present AIA does not have a cornerstone investor. The two largest shareholders are ACC (12.7%) and MCC (10.0%). Neither can be regarded as cornerstone investors particularly as the decisions on their shares is made ultimately by triennially elected councillors. CPP will provide stability to the share register. CPP has stated that it is a long term investor which seeks to add value to AIA. CPP is not a fund manager and will not be charging any fees. It is a very substantial, long term direct investor; one of the Board s reasons for terminating discussions with CPP was a perceived lack of airport experience that it would have brought to AIA. CPP is a large institutional investor and does not claim to be an airport operator although it has stated that it intends to develop a portfolio of airport investments. CPP has invested in and alongside a large number of private equity funds. These funds have investments, amongst other sectors, in aviation related businesses. CPP s extensive international contacts is a resource which AIA should be able to benefit from. CPP has indicated that it would, where possible, seek to include AIA as a co-investor with it in other airport investments. Grant Samuel understands that CPP is currently evaluating an investment in a US airport. AIA does not have the financial clout of CPP to acquire significant holdings in large airports, but utilising CPP s financial strength could give AIA useful influence in diversifying its role across a portfolio of airports; AIA will continue to be internally managed. This can be contrasted with the typical investment fund model of investing in airports which results in a variety of fees being charged to the operating entity including management fees, incentive fees, fees on the acquisition and disposal of assets and financial advisory fees. Prima facie these fees detract from the value of the underlying assets; CPP will not be able to acquire any further shares in AIA without making a further partial or full takeover offer. For a further partial offer to be made up to a shareholding level of 50% (i.e. up to a 14

44 further 10% of issued shares if the CPP Offer is successful) would also require the prior approval of other shareholders. If CPP sought a shareholding greater than 50% it could make a partial or full takeover offer for AIA; the attraction of AIA as a takeover target is diminished for the entire period that CPP owns the shareholding, which CPP states itself to be upwards of 25 years. For any subsequent takeover offer for 100% of the company from another party to be successful would require CPP to sell its 40% shareholding in AIA to the offeror. This seems an unlikely occurrence given CPP s stated long term investment objectives. Takeovers are an important mechanism by which shareholders can realise value in excess of sharemarket prices as bidders will typically pay a premium to acquire control. Impediments to a takeover are generally negative for shareholders; the share price after the CPP Offer closes is likely to be higher if CPP is successful than if it is not. A successful outcome may attract foreign investors looking to take advantage of the tax efficient distributions if the subsequent amalgamation proceeds, although the uncertainty regarding the binding tax ruling will be likely to temper their enthusiasm; if the CPP Offer is successful it is likely that the proposed amalgamation will be put to AIA shareholders. As outlined in section 3.6, the proposed amalgamation is primarily designed to advantage investors who pay little or no tax. This includes the ACC and MCC, but also CPP which does not pay tax on its income under Canadian law. However, with the CPP Offer and proposed amalgamation now being sequential rather than simultaneous (as was contemplated under the earlier CPP Amalgamation Proposal), there is a risk to CPP that the takeover is successful but the proposed amalgamation is unsuccessful. In that circumstance the status quo would likely prevail in respect of dividend policy, thereby providing CPP with a relatively low income yield on its investment. This scenario is not a favourable outcome to CPP, and it is testimony to its assessment of the quality of AIA as an investment that it is willing to take this not insubstantial risk; a possible outcome is that CPP is successful in acquiring a 40% shareholding in AIA but is unsuccessful in receiving a binding ruling from the IRD. The earlier CPP Amalgamation Proposal may have been more robust from a taxation perspective. CPP may be content to retain a 40% shareholding in AIA and not seek to amend the capital structure. The existing capital structure is considered sub-optimal to all shareholders and particularly Councils and foreign investors. AIA was presented with a number of options and settled upon the amalgamation as being the preferred solution, facilitating a means of increasing the gearing over time without exposing shareholders to an increased taxation liability. The earlier CPP Amalgamation Proposal envisaged debt progressively increasing from approximately $1.35 billion at 30 June 2008 to $3.3 billion by 2015; and CPP s options are limited in as much as it will be restricted to a maximum voting power of 30% of a reduced number of voting shares. It may chose to increase its shareholding by launching a new bid at a lower price but this if successful would only give more voting power to the other larger shareholders. It could chose to make a full bid which would almost certainly not be successful as a consequence of the Council shareholdings and their stated position not to sell. If the CPP Offer is successful it will have significant influence over but will not control the company. While CPP has stated long term investment objectives, its existence as a cornerstone controlling shareholder will materially diminish the attraction of AIA as a takeover target. If CPP is true to its investment objectives and remains a long term cornerstone investor, no takeover offer is likely to be successful for AIA for the foreseeable future. 15

45 3.5 Other Merits of the CPP Offer In assessing the other merits of the CPP Offer Grant Samuel considered the following factors: it could be that, by waiting for some period, a better price could be achieved for AIA shares if the earnings of the business are increased or the valuation parameters in the airport sector strengthen. AIA has been a very good investment for investors. Since becoming a publicly listed company in July 1998 AIA has returned to shareholders nearly one third of their initial $1.80 per share investment by way of special dividends and share cancellations. In addition the shares have been split 4:1. An initial investment of $1,000 in AIA shares at the IPO in July 1998 would now be worth $4,920 assuming the capital repayment was reinvested. This represents a compound annual growth rate of approximately 17 per cent. The last special dividend paid in 2005 was not imputed as AIA had insufficient imputation credits and unlike the 7 for 25 share cancellation in 2002 there was only nominal available subscribed capital with which to enable a tax free return of capital. Since listing, total distributions to shareholders have been funded approximately 35% from net cash flow and 65% from increased debt. The increased debt has been able to be serviced by a substantially increased cash flow from operations which has more than doubled since the IPO in 1998 and is supported by a very significant increase in the value of the airport s assets which have increased by nearly $2 billion from capital expenditure and revaluations; Grant Samuel has been advised of the process conducted by AIA Board at the time it was considering approaches to the company. As a consequence it is widely known that the Board was contemplating proposals that would see the introduction of a cornerstone shareholder to AIA. The AIA Board announced that notwithstanding it had unanimously recommended the DAE Proposal, it was not restricted from considering competing proposals from other parties. These actions should have unearthed any genuine interest from other interested parties that could potentially pay a higher price. Following the announcement of the CPP Offer the Board of AIA instructed its financial advisers to seek other offers for the company in an effort to ensure that the best offer available in the current market is put before shareholders. At the date of this report Grant Samuel is not aware of the outcome of the subsequent process, however the Board has indicated that it will keep shareholders informed of developments; debt levels in the company are forecast to increase to fund the long term capital expenditure programme whether the CPP transaction proceeds or not. However, total debt will escalate considerably if the amalgamation proposal is implemented (refer section 3.6). By 2012 total debt is forecast to increase from approximately $1.0 billion (today) to $1.4 billion (assuming the amalgamation proposal does not eventuate); if CPP is not successful in achieving the 40% holding in AIA at its current offer price it may or may not choose to increase its offer. This seems an unlikely event given CPP s profile as a long term investor for which this takeover proposal is already regarded as unconventional. If CPP chooses to increase its current offer while the offer is still open the increased value will be available to all shareholders even if they have already accepted the current offer; the existing CPP shareholding of 0.78% does not create an impediment to an alternative offer. It is possible that an alternative and higher offer than the CPP Offer could be made for the shares in AIA while the CPP Offer is open or if the CPP Offer is unsuccessful; the CPP Offer is open for 90 days and depending upon the form of the acceptance, shareholders can withdraw their acceptance prior to CPP receiving sufficient acceptances to take its shareholding to 40%. The conditional acceptance form enables shareholders to accept their shares into the CPP Offer but, in the event a more favourable offer or other such circumstance occurred, allows the shareholder to withdraw their acceptance. The right for a shareholder to withdraw its acceptance terminates upon CPP achieving sufficient acceptances to take its total shareholding to 40%. As the closing date gets closer the market will pay close attention to the outcome of the vote and the level of acceptances. If it looks likely that the 40% level will be achieved, institutional shareholders are more likely to accept as they have a fiduciary responsibility to maximise the return on their clients 16

46 funds. This will require an assessment of alternative investment opportunities and the likely price and liquidity of AIA post the CPP Offer should they chose to buy back into AIA. AIA is not required to disclose the approvals in regard to CPP becoming a 40% shareholder until the end of the offer period, but Grant Samuel expects that AIA will wish to keep the market fully informed. If it does not it will add to the uncertainty surrounding the CPP Offer. What is certain is that different shareholders will have different agendas. Clearly the decisions of the two Councils will have a significant impact on the outcome whether CPP can become the holder of 40% of AIA. MCC has indicated that it could prefer a cornerstone shareholder of around 30%. If this preference is based on control then the restrictions imposed on CPP s voting power by Canadian law and the proposed Deed may provide sufficient comfort for MCC to support CPP becoming a cornerstone shareholder. If both ACC and MCC were in favour of CPP holding 40% the Councils combined 22.7% would have a major impact on the outcome of the vote; as with any equity investment there are risks associated with the market in which the company operates. The risks and opportunities associated with an investment in AIA include: Opportunities the company has a monopoly position in Auckland and it almost certainly will remain the key gateway for international airline passengers to New Zealand; the company can be expected to continue to benefit from the relatively strong global economy; passenger numbers have increased every year and are forecast to continue to do so; there exists potential to develop a very significant portfolio of industrial and commercial properties which will provide stable cash flow; Risks there is a risk that a downturn in the global (and/or domestic) economy occurs affecting passenger travel numbers; the risk of external shock, whilst not likely to impact the airport over a sustained period of time, may negatively impact on its performance; the airport is heavily reliant on the strength of Air New Zealand and any downturn in the airline s performance will impact on the airport s performance; the impact of a revised regulatory regime is likely to negatively impact the airport s value; the airport has significant property development activities and the risks associated with an unfavourable Resource Management Act decision, tenancy issues and environmental management are significant; and the airport is heavily reliant on retail income and accordingly, changes in consumer patterns or the duty-free concessions may have a significant negative impact; the AIA share price has traded below the CPP Offer price since the Offer was announced. The likely reasons are: the market may be attributing a low probability of success to the CPP Takeover Offer; and there is lack of clarity around how many shares a shareholder may be able to sell into the CPP Offer, if any. In the absence of actual and potential takeover speculation, the AIA share price is likely to be lower than the current share price; and for those shareholders wishing to have an equity investment in the airport sector the only other comparable investment opportunity in New Zealand is Infratil, which owns a selection of infrastructure investments including shareholdings in Glasgow Prestwick Airport (100%), Lübeck 17

47 Airport (90%), Wellington Airport (66%) and Kent Airport (100%). However, these airport investments are relatively small and form part of a wider group of infrastructure investments held by Infratil. AIA has been a strongly performing investment since its listing in An issue confronting shareholders is whether the CPP Offer will produce a superior outcome as opposed to retaining their shareholdings in AIA. The CPP Offer is the outcome of a relatively public process, and it is reasonable to assume that in the current market if an alternative party was prepared to pay a higher price then that party would have emerged. 3.6 The Subsequent Proposed Amalgamation CPP s notice of intention to make an offer includes the following statement: On the successful completion of the Offer, CPP intends to re-engage with the AIA Board to have a proposal to amalgamate AIA presented to AIA Shareholders for their consideration. The partial takeover and the proposed amalgamation will give AIA Shareholders an ability to sell their AIA Shares at a very attractive cash price (subject to any scaling necessary under the Offer) or an ability to retain an investment in the Airport business. The capital restructuring is proposed to be implemented by way of an amalgamation with wholly owned subsidiaries of CPP. The amalgamation would not change the ownership of AIA but changes the form of ownership from ordinary shares to stapled securities comprising a mix of ordinary shares and convertible notes. CPP and its advisers consider an amalgamation to be the most robust method to exchange existing ordinary shares for stapled securities. It is proposed that for each share held the shareholder will receive one stapled security and approximately 20 cents cash, to be adjusted downwards for any dividends paid prior to completion of the amalgamation. The 20 cents will be funded from increased debt and will be likely to be tax free to the majority of shareholders. The increased distributions to shareholders will be funded from free cash flow which will increase as a consequence of AIA no longer being a tax payer, and increased debt. The increased debt will be provided under a secured debt package which will as a minimum require a BBB- (outlook stable) debt rating from Standard & Poors. The targeted yield of 7.0% is, at least initially, likely to comprise interest on the convertible notes, but could also comprise dividends (unimputed) and partial repayment of the convertible notes. The proposed amalgamation is a mechanism primarily designed to enable distributions to be tax efficient to overseas shareholders. CPP does not pay tax on its income under Canadian law. The distributions it would receive on its stapled securities will be subject only to an approved issuer levy (AIL) of 2% of the distribution received. If the proposed amalgamation does not proceed CPP will receive fully or partly imputed dividends. The imputation credits will be of no use to CPP. For New Zealand resident shareholders the major impact of the proposed amalgamation would be to see distributions nearly double from fully imputed dividend of 8.2 cents per share (12.2 cents gross assuming a 33 cent tax rate) to a taxable interest payment of (initially) cents (or 15.7 cents after tax assuming a 33 cent tax rate) for each stapled security. It is proposed that the interest rate on the convertible notes will increase by 0.5% after three years and thereafter on each reset date (1 3 years) until the interest rate is equivalent to the market rate for similar investments. The proposed amalgamation exchanges the existing equity into $862 million of equity and $3.4 billion of convertible notes which can be repaid to shareholders free of tax, converted into equity or retained. At the present time AIA has only $9 million of available subscribed capital which could be used to return capital free of tax to shareholders. Any amalgamation proposal will require: shareholder approval 75% of all shareholders voting including CPP and 50% of all shareholders voting excluding CPP; 18

48 a favourable ruling from the IRD; and OIO consent. The amalgamation proposal will require consideration from three distinct shareholder perspectives: NZ resident taxpayers AIA currently pays fully imputed dividends. NZ resident taxpayers are able to use the imputation to offset against their personal income tax liability. A taxpayer paying 33 cents in the dollar would pay no further tax on the dividend. A taxpayer with a marginal rate of tax of 39 cents is required to pay tax of a further 6 cents. Under the proposed amalgamation all distributions for many years to come will be taxable in the hands of NZ resident taxpayers. Under the proposed amalgamation a taxpayer on a marginal rate of tax of 33 cents will receive an estimated gross distribution per stapled security of cents (or 15.7 cents after tax). Under the status quo the fully imputed dividend per share is estimated to be 8.4 cents. Foreign investors Existing foreign investors are penalised by the imputation tax regime as they are unable to offset the NZ imputation credits against tax in an overseas jurisdiction. Overseas investors will receive a substantially higher receipt of income under the proposed amalgamation than under the status quo. In the year ending 30 June 2009 the payment to CPP will be nearly three times what it would be under the existing dividend regime. Over time the comparative advantage diminishes as dividends are forecast to continue to increase. For overseas investors the proposed amalgamation is very beneficial when compared with the status quo. Council Shareholders The two Councils have stated that their current intention is to retain their shareholding in AIA. The distributions to all shareholders will increase dramatically under the proposed amalgamation. From the perspective of Councils whose demands on expenditure already exceed their income an increase in income from their investment in AIA whilst retaining the same economic interest is likely to be attractive. If implemented the proposed amalgamation will increase the gearing of AIA through the introduction of an additional $245 million of new core debt at the outset from the proposed payment of 20 cents per share. The Stapled Securities are stated to produce an initial interest payment of 19.2 cents (7%) for the first three years and increasing annually thereafter. Dividend payments of 6.2 cents per share are proposed bringing the total distribution in year 1 to 25.4 cents. This payment will be fully taxable to tax paying shareholders. AIA s forecast net cash flow before payment of interest on the convertible notes will not be sufficient to cover the interest. AIA will therefore need to borrow to fund the convertible note interest payment. The increased debt combined with the proposed capital expenditure on terminal expansion will see core debt rise from $977 million at 31 October 2007 to approximately $3.5 billion by 30 June There are risks arising from the significant increase in debt. A downturn in passenger numbers has an immediate impact on the earnings and cash flow of Auckland Airport. Until after 2011 when the next planned terminal expansion is complete the free cash flow before loan note interest is very small. In Grant Samuel s opinion, unless there is a change to the forecast capital expenditure, any significant downturn in revenue will require the payment of interest on the convertible notes to be either deferred or suspended in order to maintain an investment grade credit rating. Interest will only be paid on the convertible notes if the backward and forward looking covenants can be satisfied and a BBB- (stable outlook) debt rating maintained. The Directors (not the shareholders) have the power to suspend interest payments and convert some or all of the convertible notes into ordinary shares. Increasing the equity by $4.1 billion would provide significant strength to the capital structure. 19

49 If the CPP Offer is successful it will be followed by a proposed amalgamation to be put to shareholders once and only if a favourable binding ruling is received from the Inland Revenue Department and following the approval of such an amalgamation proposal by the AIA Board. The likely timing of the proposed amalgamation is The proposed amalgamation is a separate transaction which will require approval of shareholders at a later date and does not form part of the CPP Offer which is the subject of this report. The proposed amalgamation seeks to implement a capital restructuring that would involve the exchange of ordinary shares for stapled securities comprising one share and one convertible note. The primary objective of the amalgamation is to enable distributions to be tax effective to entities paying little or no tax. The core beneficiaries of a proposed amalgamation are the Councils and foreign investors including CPP. Full details of the proposed amalgamation will be contained in the notice of meeting to be sent to shareholders if the proposed amalgamation eventuates. 3.7 Summary CPP has offered $ per share for 39.53% of the shares in AIA that it does not already own under a partial offer under the Takeovers Code. The CPP Offer is above Grant Samuel s assessment of the full underlying value of AIA of $ $3.48. The multiples of earnings implied by the CPP Offer price compare favourably with the earnings multiples implied by recent transactions in the airport sector and the share prices of other listed international airports. The CPP Offer is the outcome of a relatively public process, and it is reasonable to assume that in the current market if an alternative party was prepared to pay a higher price then that party would have emerged. The outcome of the CPP offer is binary for CPP it will retain its existing shareholding in AIA (of 0.78%) if either the shareholders do not approve the CPP Offer proceeding or the Offer fails to achieve acceptances sufficient to take CPP s shareholding to 40%, or it will own 40% of the shares in AIA if the Offer is successful. No other outcomes are possible for CPP. Unfortunately there are multiple outcomes for AIA shareholders. As the CPP Offer is a partial offer there is no certainty what proportion of each accepting shareholders shares in AIA will be bought if the Offer is successful. Given that excess acceptances will be scaled down, it is almost certain that if the offer is successful that accepting shareholders will not be able to sell all their shares into the Offer. This lack of clarity is problematic for communications with shareholders but is in line with the rules of the Takeover Code. If the Offer is not approved by shareholders or the Offer is unsuccessful in achieving 40%, no shares will be bought from accepting shareholders. While CPP has stated long term investment objectives, its existence as a cornerstone controlling shareholder will materially diminish the attraction of AIA as a takeover target. AIA has been a strongly performing investment since its listing in An issue confronting shareholders is whether the CPP Offer will produce a superior outcome as opposed to retaining the shareholdings in AIA. If the CPP Offer is successful it will be followed by a proposed amalgamation to be put to shareholders once and only if a favourable binding ruling is received from the Inland Revenue Department and following the approval of such an amalgamation proposal by the AIA Board. The proposed amalgamation seeks to implement a capital restructuring that would involve the exchange of ordinary shares for stapled securities comprised of a share and a convertible note. The primary objective of the proposed amalgamation is to enable distributions to be tax effective to entities paying little or no tax. The core beneficiaries of the proposed amalgamation are therefore the Councils and foreign investors including CPP. To the extent foreign shareholders are attracted to the stapled securities the share price is likely to be supported to the benefit of all shareholders. Full details of the proposed amalgamation will be contained in the notice of meeting to be sent to shareholders if the proposed amalgamation eventuates. 20

50 3.8 Acceptance or Rejection of the CPP Offer Acceptance or rejection of the CPP Offer is a matter for individual shareholders based on their own views as to value and future market conditions, risk profile, liquidity preference, portfolio strategy, tax position and other factors. In particular, taxation consequences will vary widely across shareholders. Shareholders will need to consider these consequences and, if appropriate, consult their own professional adviser. Acceptance or rejection of the CPP Offer is a separate decision from accepting or rejecting the shareholder vote permitting CPP to gain a 40% shareholding. 21

51 4. Airport Industry Overview 4.1 General Characteristics The airport industry provides a range of both aeronautical and non-aeronautical services to commercial and non-commercial airlines, private aircraft owners, commuter and cargo airlines and domestic and international aircraft passengers. The vast majority of airports are essentially facilities managers, providing land and buildings for use by airlines, retailers, freight companies and related or supporting businesses. The physical components of airports are typically divided into landside areas including parking lots, public transport stations, pick-up and drop-off areas and access roads, and airside areas including terminals, runways, taxiways and ramps. The degree to which an airport has developed its airside and landside areas largely depends on its size and the profile of traffic volumes at the airport. Airports also offer a range of support services, either directly or contracted to third parties. Airport services are generally categorised into aeronautical and non-aeronautical services: Aeronautical Services Aeronautical services include: Air traffic control services related to the co-ordination of aircraft on the ground and in the air; Ground handling the loading and unloading, refuelling, cleaning of aircraft, the replenishment of onboard consumables and, in some cases, providing check-in counter services, gate arrival and departure staff and staff for transfer counters and airline lounges; Aircraft parking the provision of a parking apron upon which an aircraft may be stationary for a period of time prior to commencing its next flight; Rescue, fire safety and hazard control services the provision of rescue and emergency equipment and staff; and Security services the provision of fencing and security personnel to ensure passenger, aircraft and airport security. Non-aeronautical Services The non-aeronautical services category encompasses a broad range of services including: Retail services the provision of space for rent by various retailers including duty-free stores, clothing outlets, cafes, restaurants and bars and souvenir retailers; Car parking the provision of car parking for use by international and domestic travellers, staff and business operators; Commercial facilities the provision of office space for use by airlines, freight companies and other commercial operators; and Development the improvement of expansion of the airport facilities for the benefit of all air-service businesses and airport patrons. Passenger volumes are considered the major driver of airport earnings. The outlook for growth in passenger numbers worldwide is very positive. The fastest growing region according to both Airbus and Boeing is Asia Pacific, and in particular India and China. Boeing is forecasting average annual traffic 22

52 between North America and Australia/New Zealand to grow at 7% p.a. and between North Asia and Australia/New Zealand to grow at 6.6% p.a. over the next 20 years 3. Air travel demand has proved to be quite resilient to external disruptions such as recession, war, terrorism and diseases. The impact of each crisis has lasted only for a short period, after which time strong growth has resumed. For example, after two years of stagnation following 2001, air travel demand increased 14% in 2004, 7% in 2005 and close to 6% in Passenger travel is not only being stimulated by a rising middle class in China and India but also by the rise of Low Cost Carriers (LCC) particularly in Europe and Asia. Both Airbus and Boeing are forecasting growth in the number of LCC operators in both Australia and New Zealand. The resilient nature of passenger volumes and the appeal of monopoly infrastructure assets have seen airport stocks re-rated over the last few years. 4.2 Sources of Revenue Landing Charges One of the key sources of revenue for airports are the charges levied on aircraft landing on its runways. In general landing charges are based on the Maximum Certified Take Off Weight (MCTOW) of the aircraft arriving at the airport. At some airports in Australia and New Zealand (other than at AIA) landing charges are charged on a per passenger basis only. This has the effect of transferring some of the airline risks to the airport in that the airlines are only charged for the passengers they are carrying rather than the alternative approach of charging airlines based on aircraft weight (i.e. essentially the number and size of aircraft), irrespective of passenger load. Airport landing charges are always under close scrutiny from the airlines and less frequently by regulators. By world standards AIA s charges, as shown by the Transport Research Laboratory (TRL) Airport Charges Index 5, are marginally above the mid point being 17 th out of the 55 airports as shown below: Source: TRL 3 Source: Current Market Outlook Boeing 4 Source: Global Market Forecast - Airbus 5 The Airport Charges Index is calculated across 50 airports around the world by taking the applicable costs for one landing and one departure (including landing charges, aircraft parking charges, any passenger-related charges and terminal navigation charges) over a sample of eight aircraft operating international services. The costs are converted into a single unit of currency and presented in numerical ranking. 23

53 Passenger Revenue Globally airports impose a broad range of arriving and departing passenger charges including passenger facilitation charges, security charges, baggage handling and reconciliation fees and departure fees. Accordingly, the number of passengers through each airport is ultimately a key driver of revenue. In addition to the various aeronautical charges applied to arriving and departing passengers, airports also derive significant retail income from travelling passengers, usually through claiming a percentage of sales from incumbent airport retail operations. 4.3 Airport Ownership The vast majority of the world s airports are owned by local, regional and national government bodies who generally contract out the day-to-day airport operation to private contractors. Privatisation of airports is really only well advanced in Australia and the UK. New Zealand and parts of Europe have some privatised airports, and the US has yet to commence airport privatisation in earnest. As a result of the lack of privatisation globally there are very few experienced international airport operators. Three of the key investors in airports globally include: Macquarie Airports and related Macquarie investment vehicles Macquarie is one of the few experienced global airport operators with investments in Bristol, Brussels, Sydney and Copenhagen Airports. Macquarie formerly held investments in Rome and Birmingham airports; HOCHTIEF HOCHTIEF is a German international construction services provider involved in the design, financing and construction of major projects. The company has an airport investment division with shareholdings in Athens, Budapest, Dusseldoff, Hamburg, Sydney and Tirana airports. HOCHTIEF also manages HTAC, another airport investment fund which is 50% owned by Australian Infrastructure Fund and Hastings Funds Management, 40% by Caisse dé dépôt et placement du Québec and 10% by KfW IPEX Bank; and Ferrovial Ferrovial is a Spanish-based global infrastructure group with investments in construction companies, airports, toll roads and car parks. In June 2006 Ferrovial headed up a consortium of investors (including Cassie dé dépôt et placement du Québec and an investment company managed by GIC Special Investments Pte Ltd) to acquire BAA, the owner of Heathrow, Gatwick, Stansted, Southampton, Aberdeen, Glasgow and Edinburgh airports, among others. 24

54 The table below outlines the ownership profile of a selection of comparable airports: Airport Industry Ownership Review Airport Government Financial Investors Infrastructure Public Other Ownership Conglomerates Auckland ACC 12.7% MCC 10.0% CPP 0.8% Other 2.6% % - Sydney - Macquarie 81.8% OTAT 6 5.0% Melbourne - HFM % DAM % AMP 51.0% Brussels 30.0% Macquarie 70.0% Bristol Macquarie 100.0% HOCHTIEF 8.1% HTAC 7 5.1% - - Copenhagen 39.2% Macquarie 53.4% 7.4% AOT % % Vienna COV % PLA % - SIIL % 40.0% Employees 10% Zurich CaZ % Various 28.3% % CiZ % Frankfurt 58.4% Julius Baer 5.1% TCGC % Birmingham 49.0% OTPP % % Deutsche Lufthansa 10% - - Employees 2.8% VFMC % Athens 55.0% - HOCHTIEF 26.7% - Private Investor 5.0% HTAC 13.3% BAA - - Ferrovial 100% - Source: Various airport websites and publications 6 Ontario Teachers Australia Trust 7 HOCHTIEF Airport Capital GmbH (50% owned by Australian Infrastructure Fund/Hastings Funds Management) 8 Hastings Funds Management 9 Deutsche Asset Management (RREEF Infrastructure) 10 Airports of Thailand 11 City of Vienna 12 Province of Lower Austria 13 Silchester International Investors Limited, London 14 Canton of Zurich 15 City of Zurich 16 The Capital Group Companies 17 Ontario Teachers Pension Plan 18 Victorian Funds Management Corporation 25

55 4.4 Capital Structure of Airports Closely related to an airport s ownership is the manner in which its capital is structured. In general airports are relatively lowly geared providing steady but low distributions to investors. The table below shows the gearing, and the market capitalisation of a range of publicly listed airports together with the relevant dividend yield: Airport Airport Industry Capital Structure Market capitalisation Book Gearing 19 (millions) Dividend Yield Auckland Airport NZD4,473 47% 4.3% Macquarie Airports AUD7, % 6.4% Airports of Thailand THB87, % 1.3% Copenhagen Airports DKK19, % na Flughafen Wien (Vienna) EUR1, % 3.0% Unique Zurich CHF2, % 0.7% Fraport EUR4, % 2.2% SAVE SpA EUR % 1.6% OMA MXN14,427.8 (26%) 1.2% PAC MXN31,932.0 (3%) 2.4% ASUR MXN19,614.3 (10%) 1.8% Source: Various airport websites, annual reports, broker s reports. Airports have proved to be comparatively robust infrastructure assets which are able to recover quickly from crises such as 9/11 and SARS. Unlike many classes of infrastructure assets which exhibit low growth, airports are forecast to exhibit relatively high growth with air traffic forecast to double between 2005 and Meeting this demand will inevitably require significant capital expenditure resulting in further privatisation and, based on experience to date, high levels of gearing. In Australia and the UK the majority of airports are now privately owned. Melbourne and Brisbane airports have net debt to equity in excess of 200%. Sydney has net debt of $6.7 billion and a deficit of shareholders funds of $493 million. The strong and growing cash flows combined with the availability of cheap credit (until very recently at least) has enabled the investment funds to significantly regear the balance sheets of their airport investments. The proposed amalgamation that may follow the CPP Offer is consistent with this approach. 4.5 Airport Regulation Airports are often subject to regulation by governments to ensure that competition is maintained or, where there are no competing airports, to prevent airports from deriving monopoly profits. This is particularly relevant where the financial health of the local airline is at risk. There are four broad categories of airport regulation: rate of return regulation; price cap regulation; trigger regulation; and self regulation 19 Net debt/shareholder s equity 26

56 Rate of Return Regulation Rate of Return (ROR) regulation enables airports to set their own aeronautical charges provided the airport s overall ROR on capital investment does not exceed an established fair rate. It is difficult to determine the appropriate fair ROR under this regulatory regime and equally difficult to measure the level of capital invested. The ROR needs to be sufficient to compensate the airport for the risks associated with the industry and high enough to attract and retain equity investors. The extent of the capital invested creates several issues as airport capital investment is, by nature, cyclical and large in scale. Regulators are often required to determine whether new capital investment is necessary as airports may be reluctant to invest in major projects if an appropriate return is not able to be derived. ROR regulation is complex and expensive to monitor and comply with. Price Cap Regulation Price Cap (PC) regulation is also a commonly used regime and is currently utilised throughout Australia and Europe. PC regulation allows an airport to increase prices whenever there is inflation or an increase in costs. The PC is usually set at inflation minus efficiency gains which the airport is expected to achieve. PC s are usually set for a period of time and reviewed and reset at the expiry of this period. There are two key forms of PC regulation which are common at various airports around the world single-till price cap and dual or multi-till price cap. Single-till PC involves all of an airport s activities being taken together when applying the price cap. Under single-till PC the regulator sets the airport s aeronautical fees so that the airport makes an allowable return (normally based on its Weighted Average Cost of Capital (WACC) on its regulated asset base which encompasses both commercial and aeronautical assets. The established fees are based on a set of assumptions covering capital expenditure, passenger growth, operating costs and nonaeronautical revenues. If the airport out-performs the regulator s assumptions, the regulator will respond, at the next review period with lower price increases. However, any surplus profits over the allowable return are able to be retained by the airport. The single-till system effectively enables airlines to benefit from the airport s nonaeronautical operating efficiencies while transferring the majority of the risks of airport operation on to the airport users. The single-till PC provides greater certainty of income for the airport but does not necessarily incentivise the airport to maximise its operating efficiency. Dual or multi-till PC regulation involves the regulation of the aeronautical aspects of the airports only (usually set so that the airport earns its cost of capital). The airport retains control over its nonaeronautical businesses enabling it to benefit from development activities and operating efficiencies. This approach is not preferred by airlines because it generally involves higher charges as the aeronautical fees are not subsidised by the non-aeronautical operations. In the event that New Zealand airports became more heavily regulated, as is being proposed by the Commerce and Transport Ministers at present, it is possible that a single-till regulation approach could be adopted. Trigger Regulation Trigger regulation establishes minimum criteria governing which airports will be regulated. As an example, certain smaller airports in the UK are unregulated, but if the government determines that the airport should be regulated or receives a complaint regarding aeronautical fees, the airport may be required to comply with regulations generally only applicable to larger airports. 27

57 New Zealand The current regulatory regime in New Zealand can be regarded as light-handed. The airports are required to consult with airlines when contemplating a price increase, although, in the event of a dispute, the airport is still permitted to increase its charges. In addition AIA must comply with a comprehensive disclosure regime. AIA is currently in a dispute with Air New Zealand over recent aeronautical charge increases imposed by the airport in September Air New Zealand is currently withholding approximately $70,000 in increased fees a month. The Government has recently stated that it considers the current regulatory regime unsatisfactory. The proposed changes to regulation in New Zealand would involve an increased level of disclosure including the way in which charges are set and the establishment of accepted price setting methodologies by the Commerce Commission. 28

58 5. Profile of Auckland Airport 5.1 Background Auckland Airport began operations in November 1965, when both domestic and international flights transferred from Whenuapai airport to the newly developed airport in Manukau. Since that time the airport has expanded significantly, in line with the growth of air travel internationally. AIA was formed in 1988 when the Government corporatised the management and ownership of Auckland Airport. The airport had previously been administered as a joint venture between the Government and the Auckland Regional Authority on behalf of the 33 councils in the region. Initially a 50% shareholder, the Government acquired Papakura District Council s shares in 1988 and later that year sold all of its shareholding when the company was listed on the New Zealand Stock Exchange. Two of the Councils in the region have retained shareholdings in the airport, with ACC holding 12.75% and MCC holding 10.05%. Since listing in 1998 earnings before interest, tax depreciation and amortisation (EBITDA) has increased by 136% from $107.4 million to $253.0 million before extraordinary items for the year ending 30 June Over the same period the total number of passenger movements has increased by 65%. Today Auckland Airport is New Zealand s largest airport handling approximately 12.3 million passenger movements per annum and 72% of all international visitors to New Zealand. AIA is New Zealand s largest and busiest airport and its second largest freight port (air and sea). It is the second largest airport for international passengers in Australasia, after Sydney Airport. The runway at AIA is 3,635 metres long and can accommodate all existing and currently foreseeable aircraft types, including the recently launched Airbus 380. A rehabilitation programme has recently been completed involving replacement, widening and strengthening of the entire runway. Construction on a second runway has commenced. Once complete the northern runway will ease congestion on the main southern runway at peak times. It will be constructed in stages, the first stage will be 1,200 metres in length and will be suitable for small non jet aircraft, the final stage will see the runway extended to a total length of 2,150 metres and will be viable for certain jet aircraft (excluding longer haul international operations). 29

59 AIA comprises four principal business activities aeronautical, retail, car parking and property. The breakdown of AIA s revenue for each segment is shown in the graph below: Revenue by Segment Car Parking 8% Other income 4% Property revenue 10% Aeronautical revenue 49% Retail revenue 29% Source: AIA 5.2 Aeronautical Revenue The Aeronautical division is the largest division by both revenue and earnings. It has three revenue streams as summarised in the table below: AIA Aeronautical Revenue (NZ$m) 2006A 2007A 2008F Landing charges Passenger Service Charge Terminal Service Charge Total

60 Landing Charges Landing charges are based on the MCTOW for each aircraft type. A comparison of international and domestic aircraft landings and revenue per landing is shown in the graph below: Source: AIA International landings and revenue per landing have been constant over the last three years. Revenue is forecast to increase slightly as a result of increased landing charges from September Domestic landings decreased slightly in 2007 due to a transition to larger aircraft and the cessation of some services, in particular Origin Pacific. Landing charges increased by 2.5% in September 2007 and will increase annually for a further four years. After that period it is proposed there will be a renegotiation with the airlines. Domestic landing charges are approximately 8% less than international charges. Landing charges as a percentage of total revenue for AIA are forecast to decline over the next 10 years. Passenger Service Charge The Development Charge (recently renamed the Passenger Service Charge (PSC)) is paid by all international departing passengers over the age of 12 and is the single largest source of revenue for the Aeronautical division. From July 2008 the PSC is to be collected by the airlines rather than paid directly by departing passengers. This will have a short term negative impact on AIA s cash flow in the financial year in which the change is implemented. The PSC will be levied against all international passengers whether departing or arriving. The levy per passenger will be halved, but the larger number of passengers being levied, combined with planned annual rate increments is expected to result in income from the PSC increasing. As a percentage of total AIA revenue it will remain constant at around 20%. 31

61 Terminal Services Charge In addition to charging airlines for airfield use, AIA levies a Terminal Services Charge (TSC) on the airlines for use of the terminal operational areas. The charge is calculated annually and levied to each airline on a fixed charge per month. The majority of airlines are party to the fixed charge regime. Those that are not pay $15 for each embarking and disembarking passenger. In the year ended 30 June 2007 the TSC averaged approximately $3 per passenger. 5.3 Non-aeronautical Revenue AIA derives non-aeronautical 20 revenue from a range of sources: AIA Non-Aeronautical Revenue (NZ$m) 2006A 2007A 2008F Retail Property Car Parking Utilities and General Total Retail Retail is the second largest revenue stream for AIA and is forecast to increase strongly following the recent tendering of the foreign exchange and duty free licences. In April 2008 an expanded duty free arrivals facility will open which is expected to increase the dollar spend per arriving passenger. AIA charges a performance based rental on retail operator turnover, with a guaranteed minimum annual rent. The percentage of the retail sales revenue AIA receives varies considerably depending on the product being sold. Income from retail is expected to remain constant as a percentage of total revenue. Retail operations include duty-free and speciality shops, foreign exchange, food and beverage outlets, banking and car rental. Although total income from retail has increased over recent years, income derived from retail operations per passenger reduced slightly in the 2006 financial year due to a number of factors, including increased processing times due to increased security and the adverse impact of peak period congestion. This trend has been reversed more recently and positive growth is expected to continue following a number of investments in retail operations. Property Rental income is generated on space leased by AIA in facilities such as terminals, cargo buildings and stand-alone investment properties. The total airport land area is approximately 1,500 hectares, of which approximately 450 hectares is targeted to be available for development into rental properties over the long term. Properties developed to date generated rental income of $33.3 million in the year ended 30 June The airport land comprises all types of land use with the exception of permanent residential and heavy industrial. There are three distinct zones identified for future commercial development: passenger terminal precinct which comprises the area within an expanded loop road servicing the international passenger terminal and, in time, a relocated domestic terminal; central zone where the majority of the development has taken place to date; and northern zone located to the North of the new Northern runway. A property valuation prepared for AIA dated 30 June 2007 attributed $255.7 million to 341 hectares of its 450 hectare development land bank. 20 non-aeronautical revenues shown in the table above exclude rate recoveries which have been netted off against expenses for the purposes of this report. 32

62 Rental income from development properties is forecast to more than triple over the next 10 years increasing from 10% to 15% of total AIA revenue. To date AIA has adopted a relatively conservative approach to property development which, given the very strong property market over the last three years, may have resulted in a lower level of earnings than could potentially have been achieved. AIA received a notice of claim under the Public Works Act in September 2006 from the Craigie Trust in regard to 36.4 hectares of land acquired for airport uses during the 1970s. The land, a small part of the company s total holding, lies east of George Bolt Memorial Drive and north of Tom Pearce Drive. It forms an integral part of the airport and is zoned for airport activities. The company is vigorously defending its entitlement to retain ownership of this land. Car Parking As at 30 June 2007 AIA had parking facilities for 8,449 cars serving the domestic and international terminals. In the three years to 30 June 2005 car parking revenue increased by 85% or an average of 22.75% per annum. Growth in revenue in the three years to 30 June 2008 is forecast to be a more modest 18% or 5.65% p.a. The significantly lower rate of growth is largely attributable to AIA not increasing car parking tariffs between 2005 and 2007, with some adjustments made in the 2008 year. A new multi-level carpark at the domestic terminal has taken longer to achieve forecast levels of occupancy than expected but is now trading well. The current carpark facilities at the international airport are relatively under-developed and do not encourage long term parking. In the longer term, multi-level parking is planned to be developed adjoining the international terminal. In the medium term carparking revenue is likely to continue to show steady growth. 5.4 Airline Development At the present time 29 international airlines operate through Auckland airport. The number of airlines has remained relatively constant over the past five years, although a number of airlines have come and gone during that period. Unlike a number of international airports AIA has experienced only marginal growth from low-cost airlines. At present Pacific Blue and Freedom Air are the only two LCCs operating from AIA. Together these two airlines represent only 6% of the weekly flights through AIA. In Europe and Asia, in particular, the growth in LCCs has been significant. Within New Zealand and on short haul international flights to Australian and the Pacific Islands, Air New Zealand has adopted a two tier form of LCC model which has acted as a barrier to new entrants. On its scheduled services Air New Zealand offers a wide range of prices which results in the price conscious traveller willing to plan in advance being subsidised by the business traveller. On purely holiday sectors Air New Zealand uses Freedom Air, however this brand is being phased out. Over recent months the Air New Zealand model has been very successful and, given the relatively small size of the market, it appears unlikely that its dominance will be challenged in the domestic market despite the arrival of Pacific Blue on key domestic routes. 5.5 Subsidiaries and Associate Companies HMSC-AIA Limited (HMSC) operates food and beverage facilities at Auckland International Airport. AIA owns 50% of the shares in HMSC, the other 50% is owned by Host International Inc. 5.6 Growth Strategy Auckland Airport is a key element of New Zealand s infrastructure. As with most infrastructure assets to service the growth in demand requires constant and significant capital investment with long lead times. AIA has adopted a strategy in respect of its international business of ensuring capital expenditure takes place in order to meet the projected demand. The long term strategic plan projects a doubling of the 33

63 number of passengers to 15 million international and 9 million domestic passengers by To satisfy this additional demand AIA s capital expenditure plans include doubling the size of the international terminal adding a further 12 gates, developing the 2,150 metre Northern runway, potentially relocating the domestic terminal, and progressing intensive commercial, hotel and carparking developments on the existing international carparks. If AIA s forecasts of passenger numbers are not achieved the impact on earnings could be significant as aeronautical and retail revenues are very closely correlated to the volume of international passengers. Tourism Research Council forecasts compound annual growth between 2004 and 2011 of 4.7%. The most recent forecasts have reduced growth between 2006 and 2013 to 4.0%. This has resulted in forecast international visitor numbers in 2011, for example, being 6.2% below the 2005 estimate. International visitors comprise approximately 55% of all passengers using the international terminal (excluding transits and transfers). International passenger growth is critical to AIA s forecasts growth in earnings. Outbound travel by New Zealanders is expected to grow at a rate of just over 2.1% p.a. compared with inbound visitor growth of over 4% p.a. The historic and projected profile of inbound international passenger numbers is summarised below: AIAL - Inbound International Passengers 2,250,000 2,000,000 1,750,000 Passenger numbers 1,500,000 1,250,000 1,000, , , , f 2008f 2009f 2010f 2011f 2012f 2013f Americas Australia Europe Japan North East Asia Rest of Asia Rest of World Source: Tourism New Zealand (August 2007). Note: United Kingdom is included in Europe, North East Asia includes China and Rest of Asia includes India. Tourism worldwide is growing rapidly as evidenced by a surge in orders for new aeroplanes particularly from the Middle and Far East driven primarily by a growth of the middle classes in China and India. China is New Zealand s fastest growing market for inbound visitors. The growth of inbound visitors is not surprisingly strongly correlated with growth in the origin country economy. A report prepared by NZIER for the Ministry of Tourism showed that a 1% growth in world income typically drives growth in tourism numbers for New Zealand by 1.7%. Growth in world income would therefore appear to have been a key driver of the strong tourism performance in New Zealand over recent decades. OECD forecasts growth in international gross domestic product to be approximately 2.7% for both 2007 and The current capital expenditure initiatives at Auckland Airport are based on expanding capacity to meet the forecast increases in passenger numbers. The Stage 3A expansion of the arrivals hall and inbound duty free store are planned to increase peak hour capacity from 1,950 passengers per hour to 2,500 passengers per hour. The proposed further expansion of the arrivals facilities, referred to as 3B, is 34

64 estimated to cost $180 million and will improve baggage claim facilities, reduce meeter and greeter congestion and reduce forecourt and roading congestion. Based on current projections of passenger growth this facility will not reach full capacity until around 2017 at the earliest. CPP has indicated broad acceptance of the current capital expenditure initiatives. This is consistent with the institutional investment nature of the CPP funds that seek long-term low risk investments. Indeed without specific airport experience it would be unusual for an investor such as CPP to exert material influence or opinion on an operational matter such as capital expenditure initiatives (unless these were deemed to be illogical or frivolous). 5.7 Financial Profile The historical financial performance of AIA for the years ended 30 June 2006 and 2007 and the forecast financial performance for the year ending 30 June 2008 are summarised below: AIA Earnings Profile (NZ$ millions) Year ending 30 June 2006A 2007A 2008F Revenue Aeronautical Non-Aeronautical Expenses Staff Repairs and Maintenance Rates and Insurance Other EBITDA Depreciation and Amortisation EBIT Net interest NPBT Taxation NPAT Dividend The following points should be taken into consideration when reviewing the table above: the reduction in earnings in the year ended 30 June 2007 was due primarily to the increase in the provision of $9.925 million in respect of the Long Term Incentive Plans for management resulting from the considerable increase in AIA s share price in the month prior to year end. Some of this provision of $10.8 million could be likely to crystalise in the event of a successful takeover offer. The expense is recorded under staff costs; the 2008 forecast reflects four months of actual results and forecast for the remaining eight months. The increase in revenue is due to slightly higher landing charges for part of the year and a forecast increase in retail revenue from an expanded arrivals duty free facility; the FY08 forecast results exclude any revaluation gain in connection with the company s investment property portfolio. The company has noted that the forecasts are subject to any material adverse events, significant one-off expenses, deterioration due to the current global market conditions or other foreseeable circumstances. In relation to one-off costs, the company has disclosed that it has 21 Earnings Before Interest, Tax, Depreciation and Amortisation 22 Earnings Before Interest and Tax 23 Net Profit Before Tax 24 Net Profit After Tax 35

65 incurred expenses of approximately $4.5 million to 31 October 2007 in connection with the review and investigation of restructuring proposals 25, including the CPP and DAE amalgamation proposals. These expenses are not included in the FY08 forecasts above; AIA has demonstrated consistent growth in EBITDA. The following graph shows that the growth in earnings is closely correlated with the growth in passenger numbers. International passengers generate significantly higher revenue and earnings per passenger than domestic passengers: AIAL - EBITDA v Passenger numbers since listing 300,000 14,000, ,000 12,000,000 NZ$000s 200, , ,000 10,000,000 8,000,000 6,000,000 4,000,000 Number of Passengers (total) 50,000 2,000, EBITDA Passenger Numbers AIA s EBITDA to revenue ratio of 78.5% is very high and only Sydney has a higher ratio at 80.7% which reflects greater size, economies of scale and higher charges. AIA s EBITDA to revenue has been achieved from a combination of a business model where many services and costs have been outsourced, aeronautical prices which are higher per passenger than some comparable regional airports (Christchurch, Melbourne and Brisbane), a very strong retail business, increasing income from property development and reflecting a much higher proportion of international passengers at Auckland compared with other airports. If the proposal to place airports under the Commerce Act is enacted it is possible (but unlikely) that it could result in the single till regulatory regime being implemented (refer section 4.5). This could have a negative impact on AIA s earnings. A comparison of selected International airports is summarised below: AIA Airport Comparisons AIA Sydney BAA Zurich Vienna Copenhagen Passengers 12,355,191 30,978, ,362,600 19,237,216 16,855,725 20,877,496 Aircraft mvmts 155, ,534 1,360, , , ,356 MCTOW 5,747,134 14,214,000 na na 6,765,734 7,840,499 EBITDA % 78.5% 80.7% 42.7% 51.3% 35.6% 54.1% EBITDA (000s) NZD252, AUD584,662 EUR845,800 CHF378,272 EUR169,600 DKK1,560, It is anticipated that there will be additional one-off costs which may be material, incurred with the CPP Offer and any other ownership proposals. 26 Adjusted for the $9.925 million provision for long-term incentive plans. 36

66 The EBITDA margins shown in the table above are affected by, among other things, airport regulation variances and the services provided by the airports (for example both BAA and Vienna provide ground handling services which yields an EBITDA margin of around 12%). The graph below shows comparative aeronautical revenue per passenger across a broad range of global airports: Source: Individual Airport websites and publications 37

67 5.8 Financial Position The statements of financial position of AIA as at 30 June 2006 and 2007 are summarised below: AIA Financial Position (NZ$millions) 30 June 2006A 2007A Current assets Cash at bank Inventories Prepayments Accounts receivable Taxation receivable Non current assets Property, plant and equipment 2, ,543.7 Investment properties Investment in subsidiary and associated company Other , ,878.1 Current liabilities Accounts payable Short-term borrowings Provision for noise mitigation Non current liabilities Term borrowings Other term liabilities Net assets 1, ,934.5 Represented by: Share capital Reserves 1, ,960.6 Retained earnings (25.4) (34.0) Total equity 1, ,934.5 The following points are relevant when considering the above table: short-term and term borrowings comprise a mixture of retail term bonds, bank debt and commercial paper; the negative balance in retained earnings reflects the relatively aggressive dividend policy which resulted in a $146.7 million Special Dividend in 2005 and dividend payments in 2006 and 2007 being at 95% and 97% of normalised Net Profit after Tax, respectively; share capital is shown net of shares cancelled as a result of the Capital Repayment in October 2002; and reserves comprise revaluation of property, plant and equipment of $1,779.7 million and revaluation of investment property of $180.9 million. 38

68 5.9 Cash Flow AIA s cash flows for the year ended 30 June 2006 and 2007 are summarised below: AIA Cash Flow (NZ$millions) Year end 30 June Receipts from customers Payments to suppliers and employees (60.7) (67.0) Cash flow from operations Interest received Dividends from associated companies Income tax paid (51.4) (44.2) Other taxes paid (0.5) (0.3) Interest paid (51.6) (62.8) Net cash flow from operating activities Proceeds from sale of assets Other investing activities Purchase of property, plant and equipment (101.0) (84.3) Expenditure on investment properties (4.4) (15.3) Interest paid - capitalised (2.8) (2.8) Other investing activities (1.1) (0.2) Net cash flow from investing activities (106.3) (101.9) Increase in share capital Increase in borrowings Buy-back of shares (8.2) - Payment of dividends (247.0) (100.1) Net cash flow from financing activities (31.3) (44.0) Net increase/(decrease) in cash held (0.2) 1.3 Cash at the beginning of period Cash at the end of the period In reviewing the above table the following should be considered: AIA has very strong cash flows from operations which in the opinion of CPP enables higher distributions to shareholders and increased debt levels to be serviced; a special dividend of $146.7 million was paid in the year ending 30 June 2006 which resulted in the increase in borrowings in that year; and in the last two years more than 50% of the dividend payout, including the special dividend, has been funded from debt. Under the status quo scenario it is expected that interest payments will continue to increase as a result of higher debt levels and higher interest rates. In all but 2004 AIA has borrowed to fund a portion of its dividends and this trend is expected to continue. If the proposed amalgamation is implemented debt will accelerate to fund the significantly higher distributions. A table of AIA s planned capital expenditure is summarised below: 39

69 AIA Forecast Capital Expenditure 27 (NZ$m Real) FY07 FY08 FY09 FY10 FY11 Airfield Terminals Expansion to Arrivals Hall Pier B Expansion to Departures Stage 3B International Terminal - other Domestic Terminal Infrastructure Carparks Property Total Capital Structure and Ownership As at 16 November 2007 AIA had 1,222 million fully paid ordinary shares on issue held by a total of approximately 50,000 shareholders. The major shareholders as at 16 November are set out in the table below: AIA Top 20 Shareholders as at 16 November 2007 Shareholder Shares (000s) % Auckland City Council 155, % Manukau City Investments 122, % HSBC Nominees (New Zealand) A/C NZCSD 76, % National Nominees New Zealand A/C NZCSD 72, % NZ Superannuation Fund Nominees A/C NZCSD 63, % ANZ Nominees - A/C NZCSD 58, % National Nominees 40, % HSBC Nominees (New Zealand) A/C NZCSD 39, % Citibank Nominees (New Zealand) A/C NZCSD 23, % Custodial Services 15, % Citicorp Nominees Pty CFS Share Fund 15, % Accident Compensation Corporation - NZCSD 14, % Citicorp Nominees Pty CFS Wholesale Imputation Fund 13, % HSBC Custody Nominees (Australia) 13, % Citicorp Nominees Pty Industrial Shareholders Fund 11, % FNZ Custodians 10, % Tea Custodians A/C NZCSD 10, % Citicorp Nominees Pty 9, % Citicorp Nominees Pty CFS Imputation Fund 9, % JP Morgan Nominees Australia Limited 8, % Top 20 Shareholders 787, % Other Shareholders 434, % Total 1,222, % 27 Excluding capitalised staff and interest costs 40

70 5.11 Share Price Performance The share price and trading volume history of AIA shares is depicted graphically below. The graph has been adjusted for the 4 for 1 share split in April Share Price (cents) Jul 98 Jan 99 Jul Dec Jun 00 Dec Jun AIA - Unit Price Performance July 1998 to November 2007 Nov 01 May 02 Nov 02 May Oct Apr Oct Market speculation regarding takeover offers Apr 05 Sep 05 Mar 06 Sep 06 Volume Traded (000s) 200,000 Mar Aug , , , , ,000 80,000 60,000 40,000 20,000 0 The AIA share price has increased consistently since its listing in The AIA share price has increased significantly over the course of 2007 following the company announcing a review of its capital structure and speculation regarding takeover activity. AIA s share price against the NZX50 index is shown in the graph below: AIA vs NZX 50 Gross Index Relative Over/Under Peformance 40% Relative Performance Graph - March 2003 to November % 20% 10% 0% Base line represents NZX 50-10% -20% -30% -40% -50% -60% Mar 03 Jul 03 Oct 03 Mar 04 Jul 04 Oct 04 Mar 05 Jul 05 Oct 05 Mar 06 Jul 06 Nov 06 Mar 07 Jul 07 Nov 07 41

71 6. Valuation of AIA 6.1 Summary Grant Samuel s valuation of the equity in AIA is $ $3.48 per share summarised below: AIA Valuation Summary $ million except where otherwise stated Low High Enterprise value 4,500 5,000 Net debt for valuation purposes (970) (970) Other assets Equity value 3,765 4,270 Fully diluted shares on issue (million) 1,226 1,226 Value per share ($) $3.07 $3.48 A value range of $4.5 - $5.0 billion has been attributed to AIA s business operations. This valuation range is an overall judgement having regard to: net present value (NPV) outcomes from discounted cash flow (DCF) analysis under a number of scenarios that adopt a range of different assumptions (refer section 6.3); the multiples of EBITDA implied by the acquisition prices of recent transactions involving other international airports (refer section 6.5); and the multiples of EBITDA implied by the trading prices of listed airports and other infrastructure owning companies (refer section 6.5). The valuation represents the estimated full underlying value of AIA assuming 100% of the company was available to be acquired and includes a premium for control. The value exceeds the price at which, based on current market conditions, Grant Samuel would expect AIA shares to trade on the NZX in the absence of a takeover offer or proposal similar in nature to the CPP Offer. The valuation reflects the strengths and weaknesses of AIA and takes into account factors such as: AIA is the second busiest airport for international passengers in Australasia (after Sydney), handling over 70% of all international visitors to New Zealand. AIA is forecasting average annual growth in passenger numbers of 4.3% - 5.4% per annum from June 2008 to June Long term growth in AIA s earnings is highly correlated to growth in passenger numbers; regular and relatively large capital expenditure is required to keep pace with the projected increases in passenger growth; and a history of consistent growth in earnings and cash flow from operations. Net debt for valuation purposes AIA net debt for valuation purposes is $970 million. This amount is the sum of the face value of net borrowings at 31 October 2007 of $977 million less an estimate for the after tax fair value of interest rate derivatives at that date. 42

72 Other Assets Management s projections over the next ten years assume approximately 91 hectares of AIA s 450 hectare of land bank will be developed for a mix of commercial and retail use. The balance of the land bank has been included as a surplus asset based on market values ascribed by independent property valuers, Seagar & Partners. Seagar & Partners prepared an independent valuation of 341 hectares of AIA s 450 hectare land bank that is being held for future commercial and industrial development 28. The valuation was prepared in accordance with Property Institute of New Zealand Professional Practice and Accounting Standard IAS40. The basis of valuation was market value assuming each property s highest and best use. Seagar & Partners valued each land asset by assessing a current market value per hectare. As a broad guide, the more intensively occupied land use areas at the airport were valued with reference to sales evidence of comparable land uses located outside the airport. The value of other future development land has been assessed based on the sale of serviced and un-serviced, business-zoned land holdings in the South Auckland market. In assessing the market value of these vacant lots Seagar & Partners stated consideration had been given to: AIA s current land use plan, which provides indicative land use areas for specialised (noncontestable) and non-specialised (contestable) assets / land-use activities; and the current zoning for the land being either Airport or Mangere-Puhinui Rural, as well as falling under the designation of Auckland International Airport Land Use, which permits a multiplicity of uses including uses that are not permitted as of right on vacant land adjacent to the airport s holdings. AIA has two blocks of land (covering approximately 103 hectares in total) that form part of its 450 hectare land bank. The land is adjacent to the planned northern runway or under the approaches and is in addition to the 341 hectares of land covered by Seagar & Partners property valuation. Seagar & Partners has separately provided management with indicative estimates of the value of these two blocks of land as at 30 June Other assets also includes an amount of $5.25 million, representing the cash that AIA would receive if all option holders elected to exercise today all of the options 29 to acquire new AIA shares that they currently hold and a value for AIA s investment in HMSC. 28 Seagar & Partners valued 362 hectares of AIA land assets as at 30 June 2007, however, only 341 hectares of this forms part of the 450 hectare development land bank. The remaining 21 of the 362 hectares valued by Seagar & Partners is not included in AIA s 450 hectare development land bank as it has largely been set aside for reserve and marae land million options are held by employees under an executive share option plan approved by shareholders in The options were issued between September 2002 and January 2004 and can now be exercised at any time before they lapse on the sixth anniversary of their issue date. Grant Samuel has not included in Other Assets the option component of the taxable cash sum payable by AIA to executives under the Phantom Option Plans for 2003, 2004, 2005 and Future cash payments to executives under long term incentive plans are included in the cash flow projections used in the DCF Analysis. 43

73 6.2 Methodology Overview Grant Samuel s valuation of AIA has been estimated on the basis of fair market value as a going concern, defined as the estimated price that could be realised in an open market over a reasonable period of time assuming that potential buyers have full information. The valuation of AIA is appropriate for the acquisition of the company as a whole and accordingly incorporates a premium for control. The value is in excess of the level at which, under current market conditions, shares in AIA could be expected to trade on the sharemarket. Shares in a listed company normally trade at a discount of 15% - 25% to the underlying value of the company as a whole, but the extent of the discount (if any) depends on the specific circumstances of each company. The most reliable evidence as to the value of a business is the price at which the business or a comparable business has been bought and sold in an arm s length transaction. In the absence of direct market evidence of value, estimates of value are made using methodologies that infer value from other available evidence. There are four primary valuation methodologies commonly used for valuing businesses: capitalisation of earnings or cash flows; discounting of projected cash flows; industry rules of thumb; and estimation of the aggregate proceeds from an orderly realisation of assets. Each of these valuation methodologies has application in different circumstances. The primary criterion for determining which methodology is appropriate is the actual practice adopted by purchasers of the type of business involved. Nevertheless, valuations are generally based on either or both discounted cash flow or multiples of earnings and Grant Samuel has had regard to both methodologies. Capitalisation of Earnings Capitalisation of earnings or cash flows is most appropriate for businesses with a substantial operating history and a consistent earnings trend that is sufficiently stable to be indicative of ongoing earnings potential. This methodology is not particularly suitable for start-up businesses, businesses with an erratic earnings pattern or businesses that have unusual expenditure requirements. This methodology involves capitalising the earnings or cash flows of a business at a multiple that reflects the risks of the business and the stream of income that it generates. These multiples can be applied to a number of different earnings or cash flow measures including EBITDA, EBITA, EBIT or net profit after tax. These are referred to respectively as EBITDA multiples, EBITA multiples, EBIT multiples and price earnings multiples. Price earnings multiples are commonly used in the context of the sharemarket. EBITDA, EBITA and EBIT multiples are more commonly used in valuing whole businesses for acquisition purposes where gearing is in the control of the acquirer. Where an ongoing business with relatively stable and predictable earnings is being valued Grant Samuel uses capitalised earnings or operating cash flows as a primary reference point. Application of this valuation methodology involves: estimation of earnings or cashflow levels that a purchaser would utilise for valuation purposes having regard to historical and forecast operating results, non-recurring items of income and expenditure and known factors likely to impact on operating performance; and 44

74 consideration of an appropriate capitalisation multiple having regard to the market rating of comparable businesses, the extent and nature of competition, the time period of earnings used, the quality of earnings, growth prospects and relative business risk. The choice between the parameters is usually not critical and should give a similar result. All are commonly used in the valuation of industrial businesses. EBITDA can be preferable if depreciation or non-cash charges distort earnings or make comparisons between companies difficult but care needs to be exercised to ensure that proper account is taken of factors such as the level of capital expenditure needed for the business and whether or not any amortisation costs also relate to ongoing cash costs. EBITA avoids the distortions of goodwill amortisation. EBIT can better adjust for differences in relative capital intensity. Determination of the appropriate earnings multiple is usually the most judgemental element of a valuation. Definitive or even indicative offers for a particular asset or business can provide the most reliable support for selection of an appropriate earnings multiple. In the absence of meaningful offers, it is necessary to infer the appropriate multiple from other evidence. The usual approach is to determine the multiple that other buyers have been prepared to pay for similar businesses in the recent past. However, each transaction will be the product of a unique combination of factors. A pattern may emerge from transactions involving similar businesses with sales typically taking place at prices corresponding to earnings multiples within a particular range. This range will generally reflect the growth prospects and risks of those businesses. Mature, low growth businesses will, in the absence of other factors, attract lower multiples than those businesses with potential for significant growth in earnings. An alternative approach used in valuing businesses is to review the multiples at which shares in listed companies in the same industry sector trade on the sharemarket. This gives an indication of the price levels at which portfolio investors are prepared to invest in these businesses. Share prices reflect trades in small parcels of shares (portfolio interests) rather than whole companies and it is necessary to adjust for this factor. The analysis of comparable transactions and sharemarket prices for comparable companies will not always lead to an obvious conclusion as to which multiple or range of multiples will apply. There will often be a wide spread of multiples and the application of judgement becomes critical. Moreover, it is necessary to consider the particular attributes of the business being valued and decide whether it warrants a higher or lower multiple than the comparable companies. This assessment is essentially a judgement. Discounted Cash flow Discounting of projected cash flows has a strong theoretical basis. It is the most commonly used method for valuation in a number of industries, and for the valuation of start-up projects where earnings during the first few years can be negative. DCF valuations involve calculating the net present value of projected cash flows. This methodology is able to explicitly capture the effect of a turnaround in the business, the ramp up to maturity or significant changes expected in capital expenditure patterns. The cash flows are discounted using a discount rate, which reflects the risk associated with the cash flow stream. Considerable judgement is required in estimating future cash flows and it is generally necessary to place great reliance on medium to long term projections prepared by management. The discount rate is also not an observable number and must be inferred from other data (usually only historical). None of this data is particularly reliable so estimates of the discount rate necessity involve a substantial element of judgment. In addition, even where cash flow forecasts are available the terminal or continuing value is usually a high proportion of value. Accordingly, the multiple used in assessing this terminal value becomes the critical determinant in the valuation (i.e. it is a de facto cash flow capitalisation valuation). 45

75 The net present value is typically extremely sensitive to relatively small changes in underlying assumptions, few of which are capable of being predicted with accuracy, particularly beyond the first two or three years. The arbitrary assumptions that need to be made and the width of any value range mean the results are often not meaningful or reliable. Notwithstanding these limitations, DCF valuations are commonly used and can at least play a role in providing a check on alternative methodologies, not least because explicit and relatively detailed assumptions need to be made as to the expected future performance of the business operations. Net Assets/Realisation of Assets Valuations based on an estimate of the aggregate proceeds from an orderly realisation of assets are commonly applied to businesses that are not going concerns. They effectively reflect liquidation values and typically attribute no value to any goodwill associated with ongoing trading. Such an approach is not appropriate in AIA s case. Industry Rules of Thumb Industry rules of thumb are commonly used in some industries. These are generally used by a valuer as a cross check of the result determined by a capitalised earnings valuation or by discounting cash flows, but in some industries rules of thumb can be the primary basis on which buyers determine prices. Grant Samuel is not aware of any commonly used rules of thumb that would be appropriate to value AIA. In any event, it should be recognised that rules of thumb are usually relatively crude and prone to misinterpretation. 6.3 DCF Analysis Grant Samuel has placed primary reliance on DCF analysis in determining a value range for AIA s business operations. This approach is considered appropriate because it allows pending changes to airport charges, the financial implication of the changes to Duty Free shopping and the redevelopment of airport arrival facilities and AIA s 2005 Master Plan 30 to be modelled explicitly. AIA management provided Grant Samuel with a ten year financial model that is used for strategic planning purposes. The financial projections contained within this model were updated by management in November 2007 specifically to enable Grant Samuel to undertake DCF analysis. A ten year horizon is considered the minimum necessary to adequately capture the value of long term growth in passenger numbers. The assumptions underlying Management s financial projections are summarised in Appendix B. Many of these key value drivers are difficult to predict with any degree of certainty over a long term and are often impacted by factors beyond management s control. Accordingly, there is significant scope for differences of opinion on some key assumptions, including but not limited to: long run passenger growth and changes in MCTOW; changes in airport charges and the regulatory environment; the financial implications of planned changes to the Duty Free shopping at the airport; the timing and extent of both aeronautical and non aeronautical property developments; and cost escalation factors for construction costs, other capital expenditure and operating expenses, most notably personnel costs. 30 AIA s 2005 Master Plan is a strategic planning tool used to ensure the most effective and efficient development of the airport s land holdings and infrastructure over time. A 69 page document dated March 2006 details AIA s 2005 Master Plan and is available to the public and downloadable from AIA s website 46

76 Grant Samuel has analysed a number of scenarios that represent differing combinations of key assumptions. Each scenario adopts, as a starting point management s current forecast for the financial year ending 30 June A brief description of each of the scenarios is set out below: Scenario A represents management s financial projections based on the assumptions outlined in Appendix A. It is implicitly assumed that under this scenario: AIA s Master Plan will be implemented with no material variations; the impact of any changes in the regulatory environment will be minimal; no new commercial domestic airport is opened in the greater Auckland region and Auckland International Airport remains the primary gateway for international air travellers to New Zealand; and no external shock or material change in macro economic conditions occurs. Scenario B - extends scenario A out to 2025 (i.e. to the end date for the current Master Plan) using high level estimates of aeronautical capital expenditure provided by management based on the Master Plan. There are no detailed projections for AIA s operations as a whole beyond Accordingly, only capital expenditure projections have been modelled explicitly beyond 2017 in conjunction with an overall growth in net operating cash flows of 3.5% pa. Scenario C Assumes that the dual-till regime is removed and a CPI+1% regime is introduced for all airport charges in Scenario D models a permanent negative change in the number of people travelling by air. Under this scenario Grant Samuel assumes that international and domestic passenger numbers fall by 10% in Thereafter growth rates match those adopted in scenario A. Scenario E models the effect of a slowdown in the domestic economy. It is assumed that international (i.e. fewer New Zealand residents travelling overseas) and domestic passenger numbers both decline by 2% in 2009 and 1% in 2010 before growth resumes in 2011 at the same rates as those used in scenario A. An economic downturn is also expected to impact on the average passenger spend at the airports. Scenario E models a decline in passenger spend rates of 4.5% in 2009 and a modest increase of 1.4% in It is also assumed that average passenger spending rebounds in 2011/12 to levels in line with those in scenario A. Scenario F models a change in the duty free regime in relation to tobacco and alcohol that negatively impacts on passenger spending for these categories. It is assumed that passenger spending for these categories falls by 10% in 2009 and thereafter grows at the same annual rates as those adopted in scenario A. Scenario G assumes that the property development undertaken as part of the Master Plan and other changes in the retail environment have a more positive flow on effect in relation to passengers propensity to spend. It is assumed that from 2012 average passenger spending increases in nominal terms at a rate of 3.5% per annum. Scenario H assumes that New Zealand remains a preferred destination for international tourists and growth in international and domestic passenger numbers averages 6% per annum from 1 July 2008 for the remaining term of the projections. 47

77 The DCF valuations from each of the scenarios above are summarised in the chart below: These values have been converted in to value a per share by adding other non operating assets and deducting net debt at 31 October 2007: The range of NPV outcomes produced by DCF analysis is significantly wider than the value range ascribed to AIA s business operations of $4.5-$5.0 billion. Grant Samuel has considered the outcomes of all the scenarios in determining the value range and notes that: 48