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How a US buyout giant’s bet on an empty London airport went sour

On a rain-lashed Thursday afternoon in early February, the departure lounge at Southend Airport is empty. There are just two flights taking off from the terminal 36 miles east of central London that once aspired to break into the top tier of British aviation.

Away from the tarmac, the near-deserted site in Essex is at the centre of an escalating dispute between one of the world’s largest private equity groups and a penny stock infrastructure company.

The $426bn investment firm Carlyle Group is demanding the early repayment of a £125mn loan made to the airport in 2021, when the aviation industry was reeling from international travel restrictions.

Carlyle says it has made multiple attempts to resolve the conflict with the airport’s London-listed owner, Esken, and that the airport has breached the terms of the loan on multiple occasions.

But for Esken chair David Shearer, Carlyle’s motives are clear: to pick up a potentially valuable London airport at a knockdown price.

“We are just at an inflection point when you see the real value of this airport over the next two or three years, and they have concluded ‘Wait a minute, let’s take this airport’,” he said.

Known as Stobart Group until a rebranding in 2021, Esken emerged in 2007 through a reverse takeover deal that allowed Eddie Stobart — the motorway haulage company known for its distinctive red and green trucks, range of toys and even a fan club — entry into the London Stock Exchange.

Among its first deals was the bet on Southend Airport, which it bought in a 2008 deal worth around £21mn.

Its plans for the site were ambitious: seeking to establish it as an alternative to busier local rivals like City Airport and Stansted, and at first, things progressed smoothly. The runway was extended and a new terminal opened in 2012, ready to profit from a surge in tourists during that year’s London Olympics.

After a decade of ownership, Esken’s thesis had been borne out. Southend was processing more than 2mn passengers a year and was ranked London’s best airport by consumer group Which? six times. A 2019 analyst note described the airport as “the jewel in the crown as London’s fastest-growing airport”.

John Strickland, an aviation consultant who advises regional airports, said Southend had “found its way”.

“They make the pitch as an overspill airport when others are full . . . They really went out aggressively to get the main airline protagonists in, but no sooner had they done that than Covid hit.”

As cash-strapped airlines consolidated around larger hubs, every airline left. Amazon logistics deliveries were left as Southend’s only flights.

Passengers at Southend Airport board an easyJet flight to Málaga © Kumar Sriskandan/Alamy

But Carlyle saw an opportunity. The buyout fund manager had previous experience investing in airports, though on a slightly different scale to Southend. Carlyle is a significant investor in the development of a new terminal at New York’s JFK Airport.

The firm, founded by billionaires including David Rubenstein, initially approached Esken in April 2020, Shearer said. By August the following year, Carlyle agreed to provide a convertible loan of £125mn to the company giving it a nominal valuation of £400mn.

Things have not gone to plan. Despite commercial flights at the airport restarting in May 2022, Southend’s recovery has been far slower than rivals, which are back close to pre-pandemic passenger numbers.

Just 89,017 passengers travelled through the airport between February 2022 and February 2023. Southend expects to welcome 500,000 people this summer, a far cry from the 2mn in the year before the pandemic.

Southend’s core problem was a struggle to lure airlines back as larger and more established peers were also competing to rebuild their airline networks, Strickland said.

“That made it much harder for an airport that was relying on others being full to the gunnels,” he said.

Last year, Esken decided to cut its losses and put the airport up for sale, following a strategic review that had begun in autumn 2022. But a lack of progress has further frustrated Carlyle.

As relations soured, the private equity firm turned to the courts.

Last September, Carlyle filed a claim in the UK High Court alleging the airport was in breach of the loan agreement. The investment group is now seeking the repayment of nearly £200mn four years early, a figure that includes the original sum lent to Southend as well as the interest due up to maturity.

Under the loan agreement, Carlyle was supposed to approve capital expenditure by the company above a certain level, a person familiar with the terms said. After one outlay, the US investor deemed Esken to be in breach.

“There have been many repeated and continuing defaults of the convertible loan agreement by London Southend Airport since 2022,” Carlyle said. “Carlyle will take all necessary steps to vigorously defend its investment in light of the defaults that have occurred.”

Esken this week announced to the London Stock Exchange that it had investigated Carlyle’s claims and believed there had been no default.

Carlyle maintains it just wants to get its money back. “Carlyle has made numerous proposals to Esken and the airport to secure the airport’s long-term future, including up to £32mn of new funding,” the firm said.

For Esken, the airport remains the last remnant of an empire that once spanned haulage, energy and infrastructure.

The company is currently without a chief executive or a chief financial officer. Its market capitalisation has shrivelled to £4.3mn. Another investment in Carlisle airport has also been battered by the pandemic.

It plans to wind down and return money to shareholders after the airports are sold.

Shearer said if he was able to do that, then he would look back on the chapter with “a degree of pride”.

“My sole objective is to make sure the airport doesn’t close. But if Carlyle decided to adopt a scorched earth policy, who knows what might happen.”

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