The Latvian government has decided to cancel the privatization of the management of Riga International Airport due to changing economic conditions in the country. Recall that TAV and Skonto Buve, a Latvian construction company, formed a 50-50 joint venture to participate in the tender in January 2009. The JV was elected for partnership with the SJSC Riga International Airport Management for the tender held by the Latvian Ministry of Transportation. However, Latvia’s cabinet of ministers have now called on SJSC Riga International Airport Management to find both short-term and long-term solutions for a new development plan involving airlines that provide transit passenger services at Riga International Airport. In line with this new strategy, TAV has started partnership negotiations with Air Baltic, Latvia’s flag carrier, to operate a new terminal that will meet the requirements of Air Baltic at Riga International Airport. Riga International Airport handled 3.7m passengers in 2008, implies 17% growth (9M09: 9% growth), and a 39% CAGR growth between the years 2003-2008. Approximately half of total passengers in Riga International Airport is carried by Air Baltic (market share was 45% in 2007), implying approximately 4% of total 41m passengers handled by TAV Airports in 2008.
We expect the cancellation of the above-mentioned tender to be positive for TAV. If the original tender had been approved, the TAV-Skonto JV would have had to undertake capital expenditures amounting to € 200m, which would have created an additional financial burden for TAV. TAV has a highly leveraged balance sheet, with € 972m consolidated net debt and € 200m net debt at the holding level. The negotiations with Air Baltic for the construction of a new terminal will enable TAV to operate in Riga with a significantly lower investment budget, estimated at around € 100m. Also note that our valuation for TAV Airports is based on current operations only; thus the news is neutral on our valuation. We expect a limited positive market reaction.