United Breweries (Holdings) Ltd., which runs Kingfisher Airlines, said on Thursday it will buy 26 percent of Deccan Aviation Ltd. signalling further consolidation in the fast expanding but loss-ridden Indian aviation market.
The deal, struck at 5.5 billion rupees, values Deccan Aviation at about 21 billion rupees.
Deccan will issue about 35 million shares at 155 rupees each to United Breweries (Holdings) — an 18 percent premium to Deccan's closing price of 131.05 rupees on Wednesday.
The deal was announced after market hours on Thursday, but news reports earlier in the day sparked a rally in Deccan shares and also some smaller rivals. Deccan shares rose 11.6 percent and United Breweries (Holdings) rose 10 percent.
“The synergy that could evolve with Kingfisher Airlines was tremendous,” G.R.Gopinath, managing director of Deccan Aviation told reporters at a news conference. “It would make enormous financial and operational sense.”
Gopinath, a former army captain and farmer, ushered in the concept of a no-frills airline in India in 2003 when he started a service between Bangalore and Hubli. Deccan now flies to 65 destinations in India.
Vijay Mallya, the flamboyant liqour tycoon who heads the UB group, one of the largest spirits makers in the world, started Kingfisher Airlines, a full-service carrier, in 2005.
The United Breweries-Deccan deal follows the just completed merger of state-run Air India and Indian Airlines, and Jet Airways Ltd's acquisition of smaller rival Air Sahara in April.
“This is in a way a consolidation started by the Jet-Sahara merger,” UB Group Chief Financial Officer Ravi Nedungadi said. “We are seeing the emergence of muscular players.”
The diversified UB group had bid to buy Air Sahara in 2006 but had walked out terming it highly expensive.
The Air Deccan-Kingfisher combine will have a fleet of 71 aircraft and fly to 70 cities and towns. Gopinath said the combine will control a third of the market and will be closer to the Jet Airways-Air Sahara market share.
United Breweries (Holdings) will become the largest shareholder in Deccan. It will also launch an open offer for a further 20 percent, as per India's takeover regulations. Gopinath will be the executive chairman and Mallya the vice-chairman.
The acquisition price is above Deccan's initial public offer price of 148 rupees a share in June last year – a level the share has never breached since listing.
UB will pay 1.5 billion rupees upfront and the balance within four weeks, Nedungadi said, adding the two airlines will continue to be run under their respective identities for the time being.
INDUSTRY GAINS
The Indian airline industry, which has grown more than 20 percent annually in the last five years, is reeling under record losses due to overcapacity, and carriers such as Go Air and Deccan regularly give away tickets for free to lure fliers.
Deccan reported a net loss of 2.13 billion rupees in the quarter to March 2007. Airlines have resorted to equity dilution and sales and lease back of planes to stay afloat.
Deccan had been trying to raise funds for several months to expand and tide over losses.
“It was required and is very good,” Surbhi Chawla, an analyst at Angel Broking said of the deal with UB. “It is definitely positive for the industry, especially at the current state of record losses.”
Kingfisher stands to benefit as Deccan will bring in scores of passengers from smaller cities, she said.
The two airlines will benefit from sharing infrastructure, ground handling services and security. “With the commonalities of fleet we forsee sharing of infrastructure and resources. This will lead to enormous cost savings,” Gopinath said.
Source : Reuters