Sats aims to ‘reduce’ size of rights issue, says CEO, after sell-off over fears of potential S$1.7b cash call

KERRY Mok, the chief executive of inflight caterer and ground handler Sats , wants shareholders to know he is looking out for their interests.

Since Sats announced some details about a proposed acquisition of Worldwide Flight Services (WFS) last week – details that included a potential rights issue to raise S$1.7 billion – the counter has lost about 24 per cent of its value.

In an interview with The Business Times, Mok stressed that the rights issue is just one of four funding sources for the deal.

“We are also very clear that we need to reduce the size of the rights issue, because we know the market doesn’t like rights issues,” he said. 

The other funding sources are an acquisition bridge facility of 1.2 billion euros (S$1.7 billion), internal cash resources and new strategic investors.

Mok said the bridge facility would fully cover the acquisition. “I just want to reassure (people) that I don’t need to do a rights issue to complete this transaction,” he noted. “Despite market conditions, we have full flexibility because the funding (from the bridge facility) gives us that certainty to close; and we can take our time to decide.”

When asked if Sats could do without a rights issue altogether for this transaction, however, Mok said he was “hesitant” to say this. He added that the company is working on a mix of the four options that will give it the “right funding structure to maximise benefits for shareholders”.

Sats is proposing to acquire WFS, the world’s largest air cargo handler, for a maximum price tag of 1.3 billion euros from an affiliate of investment firm Cerberus Capital Management.

In its announcement last week, Sats presented a potential funding plan that would involve issuing 609 million new shares at S$2.79 each. Before the announcement, Sats shares had closed at S$3.87.

But Mok said these values “talked about an illustration of a worst-case scenario of a full rights issue”. 

According to him, the company will take into account the size and timing of the rights issue, and will not announce one when “the market is not conducive”. Other factors, such as a recessionary environment, have also been considered in the transaction, he said.

Potential strategic investors have also been in touch with the company, said Mok. Some have been introduced by the company’s bankers, while others have been in touch because of their interest in the joint platform that the acquisition will create.

‘Have some faith’

Mok hopes shareholders will, like these potential strategic investors, “take a mid to longer-term view” on their investments.

“I know this (transaction) seems like it’s big and difficult, but I think we need to have some faith and confidence,” said Mok. “There could be some short-term ups and downs, but we are running the business for the long term.”

A “straw poll” of Sats’ management team revealed “overwhelming endorsement” for the acquisition, although there were some concerns about the execution of the deal, Mok noted. 

“A deal like this doesn’t come every day,” he added. “Staying status quo is easier… but we believe that this is something that if executed correctly will bring tremendous benefit to the company.” 

The acquisition will result in some shifts in Sats’ investor base, said Mok. Some shareholders whose funds are focused on Singapore or Asia will not continue to invest in a company that is becoming “more broad-based and globalised”. But new investors who see opportunities in the global cargo platform will buy into the company.

There will also be a significant shift in Sats’ balance sheet. On a pro forma basis, the deal would have taken Sats’ debt-to-equity ratio as at Mar 31 to 71 per cent from 46 per cent. Its net debt-to-Ebitda ratio would have risen to 3.4 times from 0.5.

In response to a question on whether the significant increase in the company’s gearing levels post-acquisition is worthwhile, Mok said the company will ensure that its net-debt-to-Ebitda (earnings before interest, taxes, depreciation and amortisation) will remain below four times.

“One could argue that we (Sats) have been having a lazy balance sheet…we’ve been prudent all this while,” said Mok, adding that the company’s management decided to “take the plunge” with this deal because of the synergies and benefits it offered.

Right fit

The exploration of WFS as an asset began four years ago, Mok said.

According to him, one of the reasons why WFS is a better fit for Sats than other peers is because 80 per cent of the former’s portfolio is in cargo. Its peers have a higher share in ground handling, which is a resource-heavy business and difficult to scale. 

“Air cargo is one where if you have a global network, you can scale up and you can benefit,” said Mok.

WFS also gives Sats exposure to multiple geographies in one deal. The alternative for Sats would be to acquire assets “one by one” around the world, Mok said, which would have been a lengthy and “probably painful” process for the company.