SIA draws Tiger under its wing, seeks to delist the unit

Singapore

SINGAPORE Airlines (SIA) is bringing Tiger Airways into the fold as it seeks to delist and privatise the budget carrier to push for closer integration across its four airlines.

Before the market opened on Friday, SIA announced a conditional general offer for the shares it doesn't own in Tiger at 41 Singapore cents per share, also throwing in an option to subscribe for SIA shares at S$11.1043 per share.

The offer price represents a 32 per cent premium over the last traded price of Tiger's shares of 31 cents on Thursday, but is a mere fraction of the S$1.50 initial public offering (IPO) price the budget carrier was listed at in January 2010.

"Our investment in Tiger provides the SIA group an additional engine, with opportunities for enhanced synergies with other airlines in the group," said SIA's chief executive Goh Choon Phong in a separate letter to SIA staff. "This ultimately strengthens the SIA group as it enables us to tap into market segments that would not otherwise be available to us, providing new revenue- and profit-generation opportunities."

For Tiger, which has been trying to claw its way back to profitability, this means reaping operational synergies and the benefits of being fully integrated within the group, such as network coordination. SIA made Tiger a subsidiary in October last year, throwing the bleeding budget carrier a lifeline by beefing up its stake from 40 per cent to 55.8 per cent.

Taken together, this is a win-win for both, SIA's management highlighted at a briefing on Friday. The deal values Tiger at about S$1.02 billion and the group plans to use internal cash to fund the acquisition.

At the briefing, Mr Goh explained the timing of the acquisition, saying: "We've been encouraging Scoot and Tiger to cooperate and commercially integrate as much as possible. We're seeing that progress. We think now is the time to take the integration, the synergies, to the next level. This step, what we're doing now, is necessary."

While Mr Goh sees the case for Scoot and Tiger to operate "in parallel" now, he did not rule out the idea of a merger between the two in the future.

Over the last year or so, SIA's medium/long-haul budget arm Scoot and short-haul carrier Tiger have been working more closely together, feeding each other traffic across their respective networks. Buffeted by headwinds such as declining yields, the stronger greenback as well as stiff competition from budget and full service airlines, the broader SIA group has also been aligning its portfolio of airlines more closely to maintain its edge.

The offer comes as Tiger continues on its turnaround strategy, which includes pulling out of loss-making overseas ventures in Australia, Indonesia and the Philippines. In addition, it has undertaken drastic restructuring by slashing capacity, cancelling the delivery of aircraft and leasing out surplus planes.

These efforts by Tiger essentially reversed its earlier plans to swiftly grow its paw print across South-east Asia and beyond. But overcapacity in South-east Asia as the region's carriers expanded rapidly created a cut-throat operating environment for the aviation industry, depressing yields.

Those turnaround efforts appear to be bearing fruit. When Tiger revealed its second-quarter results last month, it unveiled a net loss of S$12.76 million, narrowing substantially from the S$182.38 million loss a year ago.

But analysts highlighted that Tiger needs to lean on its parent to develop a competitive advantage, especially given the high costs of operating at Changi Airport, compared to rivals such as Malaysia's AirAsia or Indonesia's Lion Air which have large domestic markets to leverage on and cheaper operating bases.

"Tiger continues to limp," Credit Suisse's head of transport research Timothy Ross said, adding that Tiger will be more of a tabbycat if the takeover doesn't go through.

Additional synergies in the future, Mr Ross suggested, could take the form of lounge access for the SIA group's premium passengers who fly with Tiger.

The group could also implement scheduling changes for better connections between Scoot and Tiger as the two budget airlines ramp up their networks.

Defending the wide gap between the offer price and Tiger's IPO price, Mr Goh described the offer price as "very compelling", noting it is a premium over Tiger's share performance over the last six months. He also cited Bloomberg data between Oct 23 and Nov 5, stressing that at 41 cents per share, it exceeds price targets by analysts covering the stock.

Meanwhile, the option to subscribe for SIA shares is meant as an avenue for Tiger's shareholders to continue to participate in the group's growth. The option is exercisable within a 15 market day window.

The deal requires SIA to secure over 90 per cent of Tiger at the close of the offer in order to go through, which suggests that SIA might have to consider revising its offer if it fails to hit that 90 per cent threshold.

However, Mr Ross pointed out that the premium offered by SIA is one of the "richest" in takeover deals in Singapore over the last three years. Meanwhile, when Malaysia's sovereign wealth fund Khazanah Nasional took the ailing Malaysia Airlines private, it did so at around a 13 per cent premium.

Any upward revision by SIA might also be limited, Mr Ross reckons. "In terms of premium to where the stock has been in the last year, it's a generous offer."

The question of whether SIA's offer price is fair - given Tiger's IPO price - is also irrelevant, added UOB-Kay Hian analyst K Ajith, since SIA's obligation is to its own shareholders, not Tiger's minority shareholders.

"Tiger's IPO price was at a substantial premium to book value," he said. "Investors ignored the true fundamentals and macro landscape at the time."

Shares in Tiger, which year-to-date hit a low of 24.5 cents in August this year, were halted from trading early Friday morning. When the trading halt was lifted on Friday afternoon, its share price leapt to close at 41 cents. The SIA counter, on the other hand, edged down one cent to close at S$11.14.