SATS is barely recovering from the turbulence of the pandemic, but under president and CEO Kerry Mok, who took on the role just 10 months ago, the ground handler has worked up the appetite to make a “transformational” acquisition that may see it becoming a leading global player in this market.
On Sept 28, SATS announced the acquisition of Worldwide Flight Services (WFS) for EUR1.19 billion ($1.64 billion). However, the market did not take the news well, as worries over fundraising amid a down market and gloomy economic prospects prompted a selldown of the stock.
On Sept 29, the day after the deal was announced, SATS shares dropped by as much as 23.5% before ending the day at $3.07, down 20.67% for the day. At the depth of the pandemic in March 2020, SATS shares traded at $2.62.
“While we acknowledge that WFS is a good strategic fit for SATS, we are cautious about the impacts that a possible global recession may have on air cargo businesses,” says UOB Kay Hian in a Sept 29 note.
Just recently, FedEx, the leading US freight and delivery company, warned that business conditions will “further weaken”, as it reported a revenue shortfall of US$500 million ($702.3 million) for the three months ended Aug 31. Similarly, DHL reported a 10% y-o-y drop in air freight demand for August.
While Temasek, which holds a deemed interest of around 40% of SATS, can be relied on to support the funding needed to pay for the deal, other SATS shareholders face potential dilution if they do not take part. “The weak equity market sentiment amid the rising interest rate environment may not be in favour of SATS’s equity raising plan,” adds UOB Kay Hian, which has downgraded the stock from “buy” to “hold” along with a lowered target price of $3.82 from $4.20.
SATS has, for now, put in place an acquisition bridge facility as it explores the final funding structure. The company says that the base funding plan entails the use of internal cash and equity fundraising from existing shareholders and new strategic investors, which could include the placement of new shares or other hybrid securities or convertible instruments.
SATS says it remains committed to “prudent balance sheet management” and will provide further details in a circular that will be issued to its shareholders. This will contain details of the proposed WFS acquisition and the convening of an extraordinary general meeting to approve the proposed transaction. If all goes well, the deal will be sewn up by next March.
Not a bargain, but reasonable
With WFS’s enterprise value (EV) standing at EUR2.25 billion, the transaction implies an EV/Ebitda multiple of 9.7x. For the year ended March 31, WFS generated revenue of EUR1.72 billion and an ebitda of EUR232 million.
SATS says the acquisition would be immediately financially accretive, raising earnings per share by 78% from 1.8 Singapore cents as reported in FY2022 to 3.2 cents on a pro forma basis as of March 31, and increasing FY2022 pro forma revenue by more than 200%.
SATS also says that through initiatives that include cross-selling, network expansion and deeper e-commerce cargo partnerships, the combined entity is expected to capture meaningful run-rate ebitda synergies in excess of $100 million.
UOB Kay Hian calls the acquisition valuation, at 9.7x EV/Ebitda, “not a bargain but within a reasonable range”. The brokerage estimates SATS to have a normalised EV/Ebitda multiple of 9.3x for FY2025 ending March 2025, while peer transactions, according to the deal’s adviser, were at 10.2x–10.7x.
However, CGS-CIMB’s Tay Wee Kuang and Lim Siew Khee remain upbeat about the deal. The acquisition will extend SATS’s market reach beyond Asia Pacific into the US and Europe with immediate market-leading positions without operational overlap, especially in the cargo handling space.
Upon completion, the combined network will cover trade routes responsible for more than 50% of global air cargo volume. WFS operates in five of the top 10 cargo airports in North America and EMEA, including Los Angeles, Chicago, Miami, Frankfurt and Paris. SATS is already present in four of the top 10 cargo airports in Asia, including Hong Kong, Taipei, Singapore and Beijing. Such an opportunity “is hard to come by”, the analysts note.
They also expect “upside potential” from future refinancing exercises down the road. WFS is now servicing a debt load of $1.67 billion at a cost of around 7%–8% per annum. “With SATS’s strong balance sheet and credit history alongside strong shareholder support, we believe it has room to recapitalise WFS,” they state. If SATS can refinance this debt load at 4% upon maturity of the existing tranche of bonds come FY2025 or so, that is interest savings of around $67 million a year, making the acquisition more “palatable”.
For now, pending confirmation of the details of the funds to be raised, Tay and Lim are refraining from making earnings forecasts for the combined entity and have maintained their “add” call and $4.47 target price.