Pannones' Manchester Airport work takes off

North West firm Pannone & Partners has reprised its role as adviser to Manchester Airport on one of the UK's largest-ever private-to-public deals.

Manchester Airport, in which Manchester City Council is a major shareholder, has purchased Bournemouth Airport and East Midlands Airport from National Express Group through newco Crow Aerodromes in a deal worth £241m.

Steven Grant, a corporate partner at Pannones, led a multipractice team of six on the deal, including partners from the firm's property and construction department.

The airport has been a long-term client of the firm since it acted on its first corporate transaction in July 1999, when it acquired a majority interest in Humberside International Airport. With that transaction, Manchester, which is the UK's third largest airport, became the first council-owned air operator to buy another company in its own sector.

On this latest deal, Pannones worked closely with Clifford Chance, which advised Manchester Airport on the funding aspects of the deal, led by banking partner Chris Wyman.

Freshfields Bruckhaus Deringer, led by banking partner Nick Bliss, acted for the Royal Bank of Scotland, which provided £125m worth of senior debt with a £30m tranche of subordinated debt, to be repaid in 15 and 20 years respectively.

As part of the deal, the seller National Express, advised by Ashurst Morris Crisp, received £66.3m of loan repayments.

Ashursts has acted for the travel company in the past, for example on the acquisition of Prism Rail, which National Express bought for £166m in cash and paper.

The deal was cleared by the Office of Fair Trading (OFT) in January this year following concerns that a potential monopoly would be created in rail and coach services between London and Stansted Airport. However, undertakings given by National Express concerning seating capacity and pricing allowed the deal to be completed.

Commenting on the Manchester deal, which was agreed on 19 February but is still subject to approval by the OFT, Grant says: "I think this must be one of the biggest transactions involving the public sector. Most things are privatised just from an outright commercial standpoint. It's unusual to see a company with a very commercially-orientated strategy being owned by the public sector."

Because Manchester City Council owns a 55 per cent stake in the airport, while ownership of the remainder is split between nine other Greater Manchester authorities, each of which possess a 5 per cent share, the buyers had to seek consents from the Secretary of State.

To some extent, the Humberside purchase eased the way for the latest deal, since early in 1999 legislation was granted to allow Manchester to borrow funds to finance the purchase.

Grant explains: "One consent was given under the Airports Act 1986 and one under the Civil Aviation Act 1988. It simply meant that the airport could make the acquisition without it being a breach of statutory duty. It's not allowed to acquire shares in another airport without the consent of the Secretary of State."

On structuring the transaction, Bliss says: "Effectively, it was structured to give limited recourse to the assets being acquired. So if there was a default on the repayments to the Royal Bank of Scotland it would have recourse to Bournemouth and East Midlands Airport and not to Manchester Airport."

Limited recourse was also achieved through the establishment of Crow Aerodromes, leaving the local authorities one step removed from the borrowing process, since the vehicle was set up as a subsidiary of Manchester Airport, which in turn is owned by the public body shareholders.

Bliss says: "It's a complicated structure, but it's typical in a limited recourse deal."

Although the terms of the deal were agreed last month, Shaun Lascelles, a company lawyer at Ashursts, says: "It was anticipated that the deal would be signed by the end of the year, but that wasn't going to happen."

Grant says: "To be honest, I think it was always an optimistic deadline. It was a seller's timetable rather than a buyer's timetable."

Bliss says that Manchester Airport's decision to purchase the two airports is part of a growing trend of consolidation within regional airports. "There's a lot of movement in the regions because the London airports are so overcrowded," he says.

Bliss adds that the deal is a significant purchase for Manchester, which earlier last month opened its £172m second runway, because East Midlands Airport is the largest cargo site for major packaging companies such as DHL and UPS, while the use of internet ordering has increased the carriage of cargo by air.

The Manchester Airport deal coincides with the acquisition of Bristol International Airport through a joint venture made up of the airports division of Australian investment house Macquarie Bank and Spanish utilities and transport company Cintra.

Freshfields, led by banking partner Perry Noble, acted for Abbey National Treasury Services on the £230m senior bank funding for the deal. Abbey National Treasury Services acted as arranger, agent and security trustee on the transaction. The joint venture was advised by Shearman & Sterling and Osborne Clarke, while the sellers Bristol Council and bus company FirstGroup were advised by Stephenson Harwood and Burges Salmon respectively.