fbpx

[Shareholders Summary] SATS’ S$1.64B Acquisition of Worldwide Flight Services

Stocks

Written by:

Alex Yeo

On 28 September 2022, SATS announced a proposed acquisition of Worldwide Flight Service (WFS), the world’s largest air cargo handling firm. How will this acquisition impact SATS’ finances and is it a good move given the recessionary macroeconomy? Let’s find out.

What does SATS do?

SATS Ltd. (SATS) is the main ground handling and in-flight catering service provider at Singapore Changi Airport. SATS controls about 80% of Changi Airport’s ground handling and catering business.

SATS provides gateway and food services in Asia. SATS food services comprises airline catering, food distribution and logistics, industrial catering and linen and laundry services. Its gateway services span airfreight, baggage and ramp handling, passenger services, aviation security, cargo, warehousing, perishables handling to cruise handling and terminal management.

SATS’ Massive Acquisition of Worldwide Flight Services

On 28 September 2022, SATS announced a proposed acquisition of Worldwide Flight Service (WFS), the world’s largest air cargo handling firm with a global network across 164 locations and 18 countries. WFS has leading positions at key strategic hubs in Europe and North America and generated an estimated S$2.6 billion of revenue and S$350 million in EBITDA.

This strategic acquisition will create a global leader in the aviation services sector. With the global air cargo handling market growing and resilient, there are structural growth tailwinds such as e-commerce growth and demand for high value cargo handling capabilities such as for pharma requiring bespoke solutions.

The consideration to be paid is €1,187 million (approximately equivalent to S$1,639 million). There will be downwards adjustments for the acquisition costs, which in this case is born by the seller and upwards adjustments for costs to be paid by SATS should the completion of the acquisition be delayed. The total consideration is capped at S$1,755 million. This values WFS at an enterprise value of S$3,107 million and a EV/EBITDA multiple of 9.7x.

After the acquisition, SATS would become the largest cargo handler in the world.

When will SATS’ acquisition of WFS take place?

Should the offer go smoothly, SATS would close the deal by March 2023.

The acquisition is required to be completed within 10 months from 28 September 2022 (around 28 July 2023) and can be extended by another 2 months if agreed upon by the Seller.

The conditions precedents include shareholder approval at an EGM which will be convened by early 2023 and customary regulatory approval in various countries where either companies have significant operations.

The EGM would require at least a 75% majority approval from shareholders. Temasek, the controlling shareholder, which owns about 40% of SATS is allowed to vote and has agreed to vote in favour of the proposed acquisition.

If any condition is not satisfied, then the deal will either be terminated, or the timeline would be extended upon agreement by both parties.

5 key insights SATS shareholders must know about the acquisition

1) Highly strategic acquisition

The acquisition of WFS accelerates SATS’s objective of transforming the company from an Asia focused operator to a global leader in gateway and food solutions.

The acquisition will enable SATS to better serve air cargo customers in strategic hubs in Asia, Europe and the US, as well as in complementary new growth markets including Latin America and Africa. The combined network covers 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.

It is also worth thinking about how Singapore’s priority plans to revive Singapore’s aviation sector and plans for Changi Airport Terminal 5 will grow Singapore’s presence as a hub for transiting passengers, visitors and Cargo, which will benefit the enlarged SATS’.

2) Immediately financially accretive acquisition

The acquisition is 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, and increasing FY2022 pro forma revenue by more than 200%.

Through initiatives that include cross-selling, network expansion and deeper eCommerce cargo partnerships, the combined entity is expected to capture potential synergies in excess of SGD 100M over the medium term. 

3) Geographical and revenue segmental diversification

Both SATS and WFS have cargo stations and ground stations in different countries with little overlaps.

WFS also has strong Ground Handling and Cargo divisions which has proven resilient across cycles and is enjoying structural growth tailwinds such as from ecommerce growth and demand for high value cargo handling capabilities for businesses such as pharmaceuticals.

4) Potential run-rate synergies in excess of S$100 million

SATS will identify cross-selling opportunities among the combined customer bases and accelerate network expansion by securing multi-station contracts with consistent service and harmonised terms to its global customers.

SATS will leverage WFS’ leading express handling service to secure eCommerce cargo partnerships amongst its Asian-based customers. Other near-term synergy opportunities include economies of scale and premium cargo services.

5) SATS’ balance sheet profile to take on more debt

Looking at the information provided in the tables by SATS (see below), it is clear that the debt profile will change significantly and there will be a much higher interest burden at the onset. This is mainly because SATS will be taking on WFS’ debt of about S$1.7 billion and will not be reducing the debt via additional equity.

It is envisaged that the debt will reduce over time from cash generated from the combined operations.

We think that in the mean time, any hopes of reinstating dividend payouts after a 3 year hiatus (since Sept 2019) will also be reduced.

Source: SATS

How will the deal be financed?

SATS has only provided broad guidelines for the equity fund raising plans and not announced concrete plans on how they will finance the deal, except that it will not be funded by debt.

Shareholders should understand that a renounceable rights issue means that while the rights may be sold or traded, the rights may be issued at a discount. This means that existing shareholders may have to subscribe to avoid dilution.

Given that SATS’s market cap was S$4.35 billion based on its last traded share price of S$3.87, to raise S$1.7 billion, each shareholder would have to fork out nearly 40% or $1.50 in cash, this is assuming the shareholder would like to avoid dilution. This is likely not palatable for many minority investors.

Therefore, SATS is also considering a private placement or the issuance of hybrid equity to institutional or strategic investors. In this case, hybrid equity could be in the form of convertible bonds and will feature a lower interest rate than normal debt but will have the option to convert the bonds to shares at a price that is likely to be higher than the existing share price.

Should hybrid equity be issued, SATS may then seek less funding from existing minority shareholders.

Is SATS’ acquisition a good or bad news?

This seems like a great acquisition for SATS. The acquisition is strategic, immediately financially accretive and provides for geographical and segmental diversification. There are also potential medium term synergies which would lead to reduced costs.

One must applaud SATS for undertaking such an acquisition in the current challenging economic climate. This was surely only possible with the strong backing of its controlling shareholder, Temasek and with the focus on the aviation industry by the Singapore government.

However, the profile of SATS balance sheet will deteriorate significantly after the acquisition and will need time to be improved.

The impending equity fund raising will be an overhang on the share price in the short term. In addition, investors who bought into SATS as dividend investors with the hope of dividends being reinstated this year may soon see that hope disappearing and an exit by these investors may put further pressure on the share price.

On the other hand, this will be an opportunity for investors who are confident of the longer term upside from the growth of the aviation industry and also structural trends such as ecommerce and high value or cold chain logistics.

Leave a Comment