April 21, 2009 2:04 PM

Midway Airport Deal Dead, But Mayer Still Gets City $126 Million

Posted by Brian Baxter

A planned $2.5 billion privatization of Chicago's Midway Airport might be dead, but, despite the demise of the first major airport privatization in U.S. history, Mayer Brown partner John Schmidt remains optimistic.

Schmidt, together with Mayer partners Joseph Seliga and David Narefsky, negotiated a provision that allowed for the City of Chicago to hold onto an unconditional letter of credit posted by the acquiring consortium even if the group later walked away from the deal. (Click here for some background on the "penalty provision.")

Schmidt, who was named one of The American Lawyer's Dealmakers of the Year in 2005 for his work on the $1.83 billion privatization of Chicago's Skyway Toll Bridge, says the city is "irrevocably entitled" to retain the $126 million put down by the bidder group for Midway.

The consortium that won the city's first auction for Midway--led by the Vancouver International Airport Authority and consisting of Citi Infrastructure Investors and John Hancock Life Insurance--had planned a six-month extension to seek out additional financing. But evidently the cash wasn't there.

"We all thought we were moving towards the extension but they chose to walk away at this point," Schmidt says. "As far as the current consortium coming back to the table, they concluded that six months wasn't going to make a difference. I guess they weren't confident they could get this done and didn't want to build up expectations with the city and their investors."

According to Schmidt, the city intends to move forward with Midway's privatization, presumably through a renewed auction process when market conditions improve. There is no timetable for that at this time.

The silver lining to the deal's demise: the $126 million will actually provide a bigger boost to the city's budget than if the Midway privatization had been completed.

"[Chicago] itself, for its own budget, was only going to get about a $100 million out of the Midway deal," says Schmidt, a former associate attorney general in the Clinton administration. "Under state law, 90 percent of the net proceeds had to go into infrastructure or public pension funds. So the $126 million is actually more than the city would have got for its own budget."

Schmidt expresses some concern over the loss in momentum for airport privatizations generally. (Midway is not the first public-to-private-partnership or P3 deal he's seen go bust in recent months--a planned $12.8 billion privatization of the Pennsylvania Turnpike collapsed in October.)

But Schmidt believes the Midway deal helped put in place a template for future P3 transactions in the airport industry.

Schmidt and his team not only had to obtain the required approvals from the FAA, TSA, and Chicago City Council, but they also negotiated with Midway's largest tenant, Southwest Airlines. Southwest was advised by Morrison & Foerster partner Zane Gresham. The consortium was represented by a team from O'Melveny & Myers, led by project development and finance partner Eric Richards and real estate partner Denise Raytis.

"Some will say that we've never actually done [an airport privatization], and while this is certainly disappointing, we've come a long way in three years," Schmidt says. "We don't control the capital markets."

Like others at Mayer, Schmidt continues to see opportunities for P3 infrastructure deals. (Click here for a Q&A with Mayer global infrastructure and government transactions partner Joseph Seliga in Chicago Lawyer Magazine on the subject.)

Schmidt and Mayer Brown are advising Oak Brook, Ill.-based CenterPoint Properties on a proposed $8.9 billion privatization bid announced in March for the Port of Virginia.

"[Virginia's] secretary of transportation has made the initial determination that the [CenterPoint proposal] complied with the basic requirements of the statute and were generally consistent with the goals of the state's transportation policy," Schmidt says. "So now we're about 40 days into a 120-day period during which potential competitors can file their own competing proposals."

Schmidt says that after the 120-day period concludes, Virginia law provides for an evaluation committee to be appointed to look at the CenterPoint proposal and any other competing proposals. (Virginia is being advised by Philadelphia's Ballard Spahr Andrews & Ingersoll, which has previously advised the commonwealth on several highway projects and served as cocounsel with Mayer on the failed PaPike privatization.)

Which way the capital market winds will be blowing by then, only time will tell.

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