Tiger Airways - CIMB Research 2015-11-08: Take SIA’s offer

TIGER AIRWAYS HOLDINGS LIMITED Tigerair J7X.SI

Tiger Airways - Take SIA’s offer

We advise shareholders to accept SIA’s cash offer of S$0.41, as the prospects of Tiger on its own merits are poor, which underlined our previous Reduce call.
We upgrade our call to Hold, and raise the target price to the cash offer price, as we believe there is a strong likelihood of the SIA offer succeeding.
If necessary, we believe that SIA will raise the offer price, as it cannot afford to delay the execution of its long-term strategic goals.

SIA currently owns 55.7% of Tiger Airways, while minorities hold the remaining 44.23%. SIA’s voluntary offer of S$0.41/share is conditional upon SIA securing at least a 90% holding of Tiger. This means that a minimum 77.4% of minorities need to accept SIA’s offer.
Holders of Tiger’s 14.1m perpetual debt, which are all in the hands of minorities, will also be bought out at the same price, representing a value of S$0.776 per unit.

The equity cash offer also comes with an option, valid for 15 market days commencing after the settlement of the cash offer, to subscribe for SIA shares at a price of S$11.1043 per SIA share. This is approximately SIA’s current share price, so the value of the option is limited. But it gives an opportunity for Tiger’s minorities to participate in the SIA group’s future, if they so wish. If not, they can exit entirely from Tiger, at a price which they are unlikely to obtain from the secondary market in the foreseeable future.

Should SIA run the risk of not succeeding in getting at least 77.4% of minorities accept the cash offer, we strongly believe that the offer price will be raised, hence, we believe that Tiger’s delisting and privatisation is almost certain.

Without a 100% ownership of Tiger, SIA will continue to face impediments in restructuring the intangible assets of the group, primarily relating to the cross-transfer or reorganisation of airport landing/takeoff slots among the various group airlines. This is because Tiger’s independent directors have to protect the interests of Tiger’s minorities, even if it results in a less-than-optimal outcome for the SIA group as a whole.

One example is Tiger’s landing slots at congested regional airports, like Hong Kong and Jakarta. The SIA group can maximise revenue potential by switching away from Tiger’s 180-seat A320s to widebody 335-seat B787-8s or 375-seat B787-9s operated by Scoot, if demand warrants the aircraft switch.
Alternatively, landing slots can be swapped between different group airlines, in the interests of improving flight connections. Once Tiger’s minorities are bought out, conflict of interest situations will no longer arise.

Our advice to Tiger’s minority interests is to accept SIA’s offer. Take the money and invest in something else, or throw in your lot with the rest of the SIA group by taking up the options to buy SIA shares.
Either option is better than staying invested in a suboptimal airline that has few prospects for independent success.

Raymond YAP CFA CIMB Securities | http://research.itradecimb.com/ 2015-11-08

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