This article first appeared in The Edge Malaysia Weekly on June 17, 2024 - June 23, 2024

MALAYSIA Airports Holdings Bhd (MAHB) (KL:AIRPORT) has abandoned the plan to divest part of its stake in Türkiye’s Istanbul Sabiha Gökçen International Airport (ISGA) to Turkish infrastructure company IC brahim Çeçen Yatrm Holding AS (IC Holding), according to sources familiar with the matter.

MAHB holds a 100% stake in ISGA through its Turkish unit Istanbul Sabiha Gökçen Uluslararasi Havalimani Yatirim Yapim ve Isletme AS.

“Both parties were unable to reach an agreement on some of the salient terms of an earlier memorandum of understanding signed between MAHB and IC Holding. Following the expiry of the MoU recently, and with no agreement to extend it, the MoU has lapsed,” a source tells The Edge.

Sources say the MoU had hinged upon approval of the Turkish government, through its defence industry agency Savunma Sanayii Bakanl (SSB), for the divestment to IC Holding, but the approval is yet to be granted.

“The approval has not been granted yet and the MoU has expired. The MoU set out the framework for the divestment to be negotiated and the time for when the divestment is to be done,” the source says.

The Edge previously reported that MAHB was in advanced negotiations with IC Holding to divest part of its stake in ISGA and, if a deal is struck, the two would jointly run the airport.

The collaboration with IC Holding, including the divestment, was part of MAHB’s plan to secure an extension of its ISGA concession — which expires in eight years — as well as a new concession to build and operate a new terminal from the Turkish government. IC Holding has experience in airport construction and management, and has undertaken key projects in Türkiye such as Izmir Adnan Menderes Airport’s international terminal, Antalya Airport’s second runway and the international terminal of Ordu-Giresun Airport.

Sources say MAHB has been in talks with SSB to extend the concession for ISGA since 2022.

MAHB was part of a consortium that won a €1.93 billion contract in 2008 to build and manage ISGA until 2032. The airport operator has proposed to undertake additional investment in Türkiye catering to additional terminal capacity enhancement as part of the concession extension.

In his bilateral meeting with Türkiye’s President Recep Tayyip Erdogan in September last year, Prime Minister Datuk Seri Anwar Ibrahim was reported as saying that Erdogan had agreed that MAHB should continue operating the ISGA as the Turkish government was satisfied with the success of the Malaysian company operating the airport. Although the agreement to continue operations by MAHB had been announced, Anwar said it would undergo the due process to secure approval from the relevant ministry.

The existing ISGA has an annual capacity to serve up to 41 million passengers a year, which is expected to reach its maximum level in 2026.

ISGA has been recovering well post-pandemic. As of Dec 31, 2023, it recorded 37.56 million passengers, more than half of whom were international travellers.

Sources say the new terminal expansion project, known as the Midfield Terminal development, is vital to ISGA’s growth as the terminal expansion could provide more capacity for other airlines to expand their operations as travel continues to pick up post-pandemic and potentially reduce ISGA’s single customer dependency.

“Pegasus Airlines is currently the dom­­i­nant carrier at ISGA with more than 60% market share of passenger traffic. Both Pegasus and AnadoluJet, the second largest carrier at ISGA with some 30% market share, have indicated their intention to expand operations in the coming years,” a person familiar with the matter says.

Last December, the Turkish government inaugurated a second runway at ISGA, which is the third busiest airport in Türkiye after Istanbul Airport and Antalya Airport.

“Under Turkish regulations, the Midfield Terminal is deemed to be a separate infrastructure even though it is an expansion of the existing ISGA, hence, a new bid is needed. There has been talk that Malaysia — that is, MAHB — will get the Midfield Terminal development given the good relationship between the two countries. Both Anwar and Erdogan have said that on several occasions. But due process of the country still has to be followed. For MAHB, a local partner is critical to handle the negotiations with the Turkish government,” the person says.

It is understood that MAHB had appointed a master planner last year to develop a master plan with multiple expansion options for the new terminal. One option involves an interim solution of an expansion on the existing terminal (linear expansion) and eventually a more permanent solution of a new terminal being developed in the Midfield area (Midfield Terminal), which will double ISGA’s total capacity to 81 million passengers annually.

Under the phased expansion approach, the linear expansion to the existing terminal will bring ISGA’s overall capacity to 56 million passengers a year at a cost of €220 million (RM1.11 billion), followed by the Midfield Terminal development, which will increase the capacity by a further 25 million passengers a year to 81 million passengers a year at a cost of €400 million.

Another option is the upfront construction of the new Midfield Terminal, which will increase the capacity by 25 million passengers a year to 66 million passengers a year at a cost of €400 million.

“MAHB has proposed to fund the entire cost of the Midfield Terminal development. The phased approach allows time for ISGA to accumulate adequate cash to partly fund the Midfield Terminal development and repay existing loan and equity,” says the person.

The situation surrounding ISGA’s concession extension and the Midfield Terminal development remains uncertain. The proposal by Khazanah Nasional Bhd, the Employees Provident Fund, the Abu Dhabi Investment Authority and Global Infrastructure Partners to privatise and delist MAHB adds another layer of uncertainty as the deal structure and details relating to the proposed privatisation are yet to be revealed. The voluntary conditional takeover offer is still subject to obtaining regulatory approvals, and for the joint offerors to secure a minimum 90% stake.

MAHB’s share price is up 35% year to date to close at RM9.92 last Friday for a market value of RM16.55 billion. However, it is still 10% lower than the takeover offer price of RM11 per share.

A spokesman for MAHB says ISGA will remain the airport operator’s strategic overseas investment, “enhancing our credibility as a global airport operator”.

“MAHB is committed to delivering growth at ISGA with continued focus on operational excellence and sustainable development,” the spokesman says in an email reply to The Edge.

As the wait continues, hectic lobbying has started by other Turkish companies looking to secure the concession to build and operate Midfield Terminal as well. Whether MAHB will go it alone with its new shareholders or seek out a partner, IC Holding is still interested to team up with MAHB in the expansion of the terminal, sources say.

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