The Work

September 30, 2008 7:24 PM

Mayer Brown, O'Melveny Land Roles on $2.5 Billion Airport Privatization

Posted by Brian Baxter


At a time when the government is giving away billions to rescue beleaguered corporations, the announcement by the City of Chicago on Tuesday that it was leasing Midway International Airport to a private investor group for $2.5 billion came as somewhat of a surprise.

Represented by longtime infrastructure counsel at Mayer Brown--the firm also advised the city on its $1.83 billion privatization of the Chicago Skyway Toll Bridge in 2005--the deal is the first privatization of a major airport in U.S. history.

"In some ways the appeal of infrastructure assets is that they are stable and predictable, especially at a time when everything else is falling apart around the world," says Mayer transportation infrastructure partner John Schmidt, who was named a Dealmaker of the Year by The American Lawyer in April 2005 for his work on the Chicago Skyway project. "We were also helped by the fact that banks that are the principal lenders for infrastructure transactions are primarily European--particularly Spanish--banks, which haven't as yet been affected by the current U.S. [credit] problems."

The winning bidder was a consortium consisting of the Vancouver International Airport Authority, a private company that operates the Vancouver airport and 17 other major airports throughout the world, Citi Infrastructure Investors, and John Hancock Life Insurance.

Eric Richards, a project development and finance partner with O'Melveny & Myers in Los Angeles, served as lead counsel to the investor group along with real estate partner Denise Raytis and associate Elizabeth Dubeck. (Richards and Raytis declined to comment on the pending transaction.)

Schmidt declines to say how many bidders put in for the airport investment, but notes that the firm has been working on the matter for the past two years. The current deal was made possible under a federal law passed in 1996 that allows for the privatization of up to five U.S. airports on a pilot basis.

"There has only been one small airport in Newburgh, N.Y., [privatized] in the late nineties and that transaction was later underdone when the Port Authority took it over," Schmidt says. "So while there are a lot of airports around the world that have been privatized, [Midway] is the first major U.S. airport."

In order to proceed with the privatization, federal law required that lawyers for the city obtain approvals from 65 percent of the airlines operating out of Midway as well as airlines with 65 percent of the air traffic at the airport. (While smaller than Chicago's O'Hare International Airport, Midway is much closer to the city's downtown area and thus a preferred destination for many Windy City travelers.)

Schmidt and a team from Mayer that included government transactions partner Joseph Seliga, municipal finance partner David Narefsky, and associates Michael Serafini and Bobby Owens, spent almost a year negotiating with the dominant airline at Midway--Dallas-based Southwest Airlines--over the rates and charges for airlines after the privatization. (Zane Gresham, a public works and private facilities partner with Morrison & Foerster in San Francisco, represented Southwest in Midway-related negotiations.)

After the Mayer lawyers reached similar agreements with several other airlines earlier this year, the city was ready to begin the bidding process. As part of a due diligence deal with the airlines, Midway bidders needed to be vetted by both the city and the airlines as being qualified to potentially operate the airport. Schmidt says the bidding process concluded in late summer with documentation for the winning bid being finalized on Monday night.

"It was an incredibly complicated transaction because it not only involved the acquisition of an airport, which is a complicated business, but simultaneously called for negotiating a new 'use agreement' with the airlines to govern the operation of the airport," Schmidt says. "And then it also has a complicated regulatory overlay with both the Federal Aviation Administration and Transportation Security Administration, so it's been a long road to get where we are now."

Also advising the city on the deal were Chicago firm Pugh, Jones, Johnson & Quandt and Eduardo Cotillas, a former Pugh Jones partner now with his own practice. An undisclosed lender group involved with the winning bid was also represented by project finance and infrastructure partners Martin Klepper and Harold Moore from Skadden, Arps, Slate, Meagher & Flom.

Schmidt says that if the current deal proves successful for Midway, federal law could be expanded to allow more than five airport privatizations.

The Chicago city council will meet next week to vote on the privatization. If approved, it will be sent to the FAA for final approval. Schmidt says he expects the transaction to close sometime before the end of the year or early January.

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