SATS - UOB Kay Hian 2022-09-22: In Ongoing Discussion About A Large Acquisition

SATS LTD. (SGX:S58) | SGinvestors.io SATS LTD. (SGX:S58)

SATS - In Ongoing Discussion About A Large Acquisition

  • SATS is in an ongoing discussion regarding a potential acquisition of Worldwide Flight Services (WFS), though there is no guarantee this deal will materialise. Information is very limited at this juncture but based on an unverified figure quoted by Bloomberg, the deal could be worth as much as $3b.
  • This report shares our initial findings about WFS. With significant uncertainties and limited disclosure related to the deal, our recommendation and target price on SATS are now UNDER REVIEW.

SATS is in ongoing discussion about a large acquisition.

  • In a news article titled “SATS Said in Talks to Buy $3 Billion Worldwide Flight Services” published on 21 Sep 22 afternoon, Bloomberg quoted an anonymous source noting that SATS (SGX:S58) is in talks to acquire air cargo handler Worldwide Flight Services from its current owner, Cerberus Capital Management (a US private equity firm), for as much as (US)$3b and has sounded out for funding. Shortly after this news came out, SATS requested a trading halt for its shares and subsequently announced on SGX clarifying that:
    1. there is an ongoing discussion about the potential acquisition,
    2. no definitive term or formal legal documentation (including the consideration) has been agreed upon, and
    3. the Bloomberg article contains materially inaccurate information.
  • Refer to SATS' announcement dated 21 Sep 22, SATS noted that it is constantly on the lookout for acquisition opportunities and there is no certainty that this deal will proceed or materialise.

About the acquisition target – WFS

  • World’s largest air cargo handler. Founded in 1971, Paris-based WFS is said to be the world’s largest air cargo handler operating in more than 160 airports in over 20 countries with a staff strength of over 32,000. It serves more than 270 airlines globally. Based on our research from various public resources (including news articles, management interviews, etc), WFS’s normalised annual revenue is in the range of €1.4b-1.6b, and it reported adjusted EBITDA of €182m in 2021.
  • It has changed hands three times since 2006. Before the speculation of a possible deal with SATS, we note that WFS has already changed hands three times in the past 16 years and was held by three private equity (PE) firms in a sequential order:
    • First change of hands. In 2006, LBO France acquired WFS from industrial conglomerate VINCI at an enterprise value (EV) of €315m when WFS generated €505m in revenue in 2005 and had a staff strength of 11,000. The transaction valuation implied EV/sales of 0.62x
    • Second change of hands. In 2015, Platinum Equity acquired WFS from LBO France for an undisclosed amount, when WPS’ annual revenue in 2015 was €750m and it had 14,000 staff.
    • Third change of hands. In 2018, Cerberus Capital Management (the current owner) acquired WFS from Platinum Equity for €1.2b, when WFS had annual sales of about €1.2b and 22,000 staff. The acquisition valuation implied EV/sales of 1.0x.
  • 7.3% revenue CAGR over 16 years in the hands of PEs, driven by organic growth and bolt-on acquisitions. Over the years in the hands of P/E firms, WFS has achieved revenue CAGR of 7.3% over 16 years since 2005, driven by both organic growth and bolt-on acquisitions (led by the P/E firms).
  • A recent example of WFS’ bolt-on acquisitions is the acquisition of Mercury Air Cargo, the largest air cargo handler (with 1,500 staff) in Los Angeles, US, in late 2021. With the completion of this acquisition, WFS’ pro forma annual revenue was estimated at €1.6b in 2021.
  • In the most recent interview by Aircargo News on 5 Sep 22, WFS CEO said he expects WFS’ revenue to reach €1.8b in 2022.

No certainty this deal will materialise.

  • Referring to SATS’ clarifications on the SGX, we believe that the talk of a possible acquisition is within the routine business development activities of SATS and highlight that it is too early to conclude the deal will go through.
  • The rumoured valuation level does not appear cheap at first look… Without better clarity on WFS’ financials and if the rumoured US$3b (€3b) valuation level in the previous Bloomberg news is adopted, the deal does not appear cheap at first look. It translated to 1.88x over WFS’ 2021 sales (about €1.6b) or 1.67x over 2022F sales (about €1.8b); this is compared to the seller’s (PE firm) previous acquisition EV/sales of 1.0x back in 2018. In addition, based on our findings from public information, WFS’ 2021 EBITDA margin of 11.4% is thinner than SATS’ ground handling business segment EBITDA margin of 15- 16% before the pandemic broke out. WFS’ operating margin would be even lower, likely at mid-to-high single-digit if depreciation is considered; in comparison, SATS’ ground handling business operating margin was at 10-12% before the pandemic.
  • …but it still depends on SATS’ judgement and justification for potential synergy. In the hands of the three P/E firms over the years, we believe the low-hanging fruits of growth opportunities that can be seized by financial investors are likely to have been largely harvested.
  • Having said that, SATS, as an industry player with a solid track record and expertise in the air cargo handling business, may still manage to achieve further growth out of WFS. We believe there are likely synergies between WFS and SATS’ existing air cargo handling business but we defer to SATS management on further disclosure (if any) and justifications regarding the estimated synergy that can be realised.

If SATS is to proceed with the deal, equity-raising is likely.

  • Given SATS’ equity value of S$1.7b as at end-1H22 (with a slight net cash position of about S$150m), we estimate that SATS’ net gearing will shoot to over 200%, if SATS is to proceed with the deal at the rumoured valuation level with only debt financing. Therefore, we think equity-raising is highly likely if SATS is to proceed with this deal.
  • The acquisition, if closed, is likely to lead to significant goodwill. We note that the air cargo ground handling business is likely relatively asset-light in nature. As such, the transaction (if it ever happens) is likely to lead to significant goodwill being recognised on SATS’ balance sheet.

SATS - Earnings forecast revision & recommendation

  • Without clarity on:
    1. whether the deal will go through,
    2. the exact valuation level the buyer and seller can agree upon (if ever),
    3. financial details of the potential target,
    4. SATS’ financing plan,
  • – we have yet to incorporate any impact from the acquisition into our financial forecast.
  • The fair value of SATS is significantly dependent on:
    1. whether this deal goes through, and
    2. the richness/cheapness of the transaction valuation if the deal goes through.
  • See
  • Given the significant uncertainties related to the deal and limited disclosure at this juncture, our recommendation and target price on SATS are put UNDER REVIEW.

Roy Chen CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-09-22
SGX Stock Analyst Report UNDER REVIEW MAINTAIN HOLD 3.820 SAME 3.820