Hot stock: SATS hits 2.5-month low following news of potential acquisition

SATS shares dropped to a 2.5-month low on Thursday (Sep 22) morning, after the in-flight caterer and ground handler disclosed on Wednesday that it is in talks to acquire air cargo handler Worldwide Flight Services.

The counter dropped to a low of S$3.87 as at 10.33 am on the day, down 5.1 per cent or S$0.21 with 4.8 million shares changing hands. The last time the counter closed near this level was on Jul 5. SATS shares were down 5.1 per cent to S$3.88 at market close.

But the deal, Citi analysts said, could be “strategically correct” to SATS, given the limited overlap in the geographies they serve, which would pave the way for the Singapore-listed player to scale up.

In the note, Citi analysts said SATS’ potential target, which operates in more than 160 major airports in over 20 countries in North America and Europe, has limited geographical overlap with the Singapore player, which has an Asia-Pacific focus.

“We believe a combined entity would offer increased global breadth and end-to-end ground handling services to major international airlines groups such as Emirates, British Airways or Turkish Airlines at their destination airports,” Citi analysts wrote.

Also, the analysts noted that the move would create the world’s third-largest ground handler based on their total number of stations. “We believe the combination should lead to revenue synergies (product or geographical bundling), cost synergies (bulk procurement or reduce staff functional duplication) and financial synergies.”

The bond rating, Citi analysts wrote, of Worldwide Flight Services of B/B3 may improve if the market sees SATS’ major shareholder and Singapore state investor Temasek as an implicit guarantor. Already, the bond prices have jumped, noted the analysts.

On the structure it could take, they said, could be a share swap into a merged entity. This is because SATS had about US$1.3 billion in equity with about US$178 million in net cash, excluding lease liability, as of Jun 22. Even if the company could take on US$2.6 billion in borrowing, or a gearing ratio of 2, the borrowed amount is still lower than Worldwide Flight Services’ US$3 billion price tag.

While the report by Citi has stated a target price of S$4.70 with a “buy” recommendation on SATS, the analysts qualified that these are subject to the structure, potential earnings, synergy contributions, valuation and dilution risks of the deal, should it proceed.

Founded in 1971, Paris-based Worldwide Flight Services operates in more than 160 major airports in over 20 countries, said its website. Cerberus bought the air cargo handler in 2018 for about 1.2 billion euros (S$1.68 billion).