Over in Europe, the "it's a small world" of airport ownership just got a little smaller.
BAA PLC (Pink Sheets: BAAPY), the London-based operator of airports, outbid local European competitors Fraport and Hochtief for the right to acquire a 75%-minus-one-share interest in Budapest's Ferihegy International Airport. The winning bid: $2.2 billion, plus an agreement to invest a further $313 million in developing and modernizing the airport and associated facilities.
Even before this deal, BAA was already the world's largest operator of airports. In the U.K., it both owns and operates seven airports, including the two largest, Heathrow and Gatwick. According to Capital IQ, the firm also maintains interests in 11 other airports around the world, ranging from Australia to Italy to the United States. In addition to running the airport businesses per se, BAA also manages airports' food, financial, travel, parking, and telecommunications services, and runs the World Duty Free chain.
This is big business, folks -- and profitable, too. Over the past year, BAA has booked $3.9 billion worth of revenues. Want to take a guess at how much of that dropped to the bottom line? Perhaps 1%, or 3%? Those kinds of tight margins aren't at all uncommon in the retailing world, from which BAA derives a part of its sales. But no, BAA earned an astonishing 25.8% net margin on its revenues last year.
It's that kind of a mammoth profit margin that permitted BAA to pay what many financial analysts are calling an insane sum to acquire the Ferihegy stake -- 30 times the airport's forward EBITDA (and remember, this is for just a 75% interest in those earnings before interest, taxes, depreciation, and amortization.) BAA can afford the price, and believes it will transform this investment into further profits . eventually. Through lowering the fees paid by airlines such as EasyJet and Air France
Between now and that far-off date, BAA has no competitors of its size to worry about. For investors interested in (a) diversifying internationally and (b) buying into a company with one of the largest "moats" around its business imaginable, BAA looks worthy of further investigation. It sells for 12.8 times earnings and just 1.3 times its book value, and pays a 3.3% dividend, making it an ideal prospect for aficionados of The Motley Fool's dividend-stock newsletter, Motley Fool Income Investor.
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Fool contributor Rich Smith does not own shares of any company named above.