Finding and accommodating a new investor was not easy

3.21 Given the position of the Airline Group, it was clear that to meet the Department's condition that it would only provide new shareholder funding on the basis of a matching private-sector investment, a new investor would have to be found. This was not initially welcomed by other participants. The banks and the Airline Group faced the prospect of having to make concessions to accommodate a new investor, who would be likely to demand advantageous terms at their expense. NATS initially questioned whether an appropriate new investor could be found and were concerned about the delay and uncertainty that a selection process could add to the negotiations. However, the Department, backed within NATS by their Partnership Directors, stood their ground and secured their participation in a process to identify a new investor.

3.22 The process considered a range of different investors, most of whom would have a strategic interest in NATS' business. It included other countries' air traffic control businesses, suppliers of ATC systems, airport operators and facilities managers. The process tested the appetite of some 20 potential investors; this number was narrowed down to nine, and then short listing identified two potential investors. The narrowing and short listing was relatively straightforward because few players were seriously interested by the opportunity. The selection process identified BAA plc as the most suitable investor. NATS and its shareholders felt that BAA had a good strategic alignment with NATS and that BAA plc's modest required return and shareholder rights requirements made it the most attractive additional equity partner.

3.23 The implementation of BAA's proposed investment had to identify and address any perceived conflicts of interest, for example, in theory, BAA might have an incentive to award preferential air traffic service contracts to NATS, or, BAA might influence NATS to favour BAA's airports in providing air traffic management. The former possibility was evaluated as having little substance, as there would be no net gain for BAA in awarding preferential contracts to a supplier in which it had only a minority stake. However, it was addressed by a supplement to the Shareholders' Strategic Partnership Agreement, where BAA agreed that it will absent itself from the relevant parts of shareholder meetings and have no vote at such meetings or matters affecting the airports business in the UK. The latter possibility was seen as adequately safeguarded against by the Civil Aviation Authority's role as airspace regulator, by the terms of NATS' licence and by general competition law. In addition, the following factors ensured that the investment did not require European competition clearance:

■  BAA will be a minority shareholder in NATS, with an equity interest and voting rights of less than 5 per cent;

■  BAA would acquire the right to appoint only two non-executive directors to the board of NATS, out of a possible 17;

■  Although BAA's consent as shareholder will be required for a limited number of matters, these rights are designed to protect BAA's interests as a minority investor, and will not give BAA the ability to exercise decisive influence over NATS; and

■  The UK Government and the Airline Group will continue to have joint control over NATS.