Sunday, September 4, 2011

Airlines share swap: Barbarians past the gates

By Yang Berhormat William Leong, Ahli Parlimen Selayang
In the 10-year war for control of the Malaysian skies, while a besieged MAS was desperately fighting for survival, someone opened the gates for the barbarians to enter.

The Air Asia-MAS share swap reminds me of the takeover saga of RJR Nabisco.
The company was a merger in 1985 of RJ Reynolds, the tobacco company selling "Camel", "Winston" and "Salem" cigarettes and Nabisco, the biscuit company selling "Oreo", "Ritz Crackers" and snacks.

The financial firm of Kohberg Kravis Roberts & Co (commonly referred to as "KKR") made a hostile takeover bid for the company. There was a fierce battle for control of the company.
The board, in protecting the company's and shareholders' interests, drove KKR and the other bidders to raise their bids several times until KKR won with a bid of US$31.1 billion. It was the largest leverage buyout in history and the record stood for 17 years.

RJ Reynolds was subsequently spun out of RJR Nabisco as a result of tobacco legislation.
Nabisco is now owned by Kraft Foods. The RJR Nabisco leverage buyout was considered to be the pre-eminent example of corporate and executive greed. The events were chronicled in a book called "Barbarians at the Gate: The Fall of RJR Nabisco".

air asia plane 280907The fight for the control of the Malaysian skies has been an uneven battle from the beginning.
In the end, those responsible for the defence of MAS not only did not put up a fight but opened the gates to allow Air Asia into the MAS management. The share swap has given rise to concerns over the pricing and whether it will benefit the public-funded MAS.

Share pricing raised eyebrows

One of the favourite sayings of corporate raiders and businessmen is "OPM" - that is to operate using "Other People's Money". In the case of the AirAsia-MAS share swap, it is the people's money because MAS is funded by taxpayers.

The pricing of the share swap has raised eyebrows. The parties in using the Aug 5 closing market price of both airlines as the basis for the share swap have raised several concerns.
Anwar Ibrahim in his Aug 10 article, "MAS-AirAsia Share Swap Deal Raises Serious Concerns Over Effective Control and Governance", referred to, among others, issues of insider trading and asset stripping.

MAS share priceA look at the price charts of the two companies for the past six months supports Anwar's concerns. MAS share price (left) fell sharply on May 30, 2011, to RM1.34.
It continued to be in the doldrums until Aug 5, the date of the share swap announcement. AirAsia's share price was on a steep and sharp climb from May. It surged to a height of RM4.20 on Aug 4, 2011. This is on the eve of the announcement.

There may be good reasons for the share prices of the two counters moving the way they did. However, it seems improbable for this to be coincidental.
Airasia share priceAirAsia's price was trading around its highest (right) and MAS among its lowest when the share swap took place. Air Asia's price fell immediately after the announcement.

It could be that those who held AirAsia shares did not like the deal. It could be whoever was playing up the AirAsia shares stopped doing so. There is, therefore, cause for investigations to be initiated.
Others have raised concerns over the price. Khazanah exchanged 20 percent of MAS at RM1.60 per share for 10 percent of AirAsia at RM3.95 per share. They believe the price should not have been based only on the Aug 5 closing market price of the two counters.

They point out that MAS in fact is worth more than the price traded because it is an asset backed corporation. It has a paid-up capital of RM3.34 billion represented by fixed asset value at RM8.4 billion, net asset at RM6.92 billion.
AirAsia on the other hand is a debt-laden company. It has borrowings of RM7.7 billion. MAS' cash position is RM2.086 billion while AirAsia's is RM1.7 billion. Those who approved the deal will need to justify the pricing.

NONEOne other issue on the pricing is the timing of the deal. The share swap was announced on Aug 9. This was within 30 days before both AirAsia and MAS announced their respective 2nd Quarter Financial results on Aug 23.

Under the Bursa Malaysia Listing Requirements, this is known as the "closed period". Those in possession of the financial results during the closed period are not allowed to deal with the shares until the results are announced.
This is to prevent insider trading by those with possession of price sensitive information. Those who trade in the shares with such information will be taking unfair advantage of the public who are unaware of the situation.

Paragraph 14.08 of the Listing Requirements allows principal officers who do not possess the information to deal during the closed period by giving the requisite notification.
Although the listing requirements allow such dealings, it would have been more prudent not to enter into the share swap during the closed period.

If the share swap was made after the financial results of both airlines were announced, the market may have given a better reflection of the share prices of both airlines.
This may be seen from the share price of AirAsia after the results were announced on Aug 23. Although AirAsia announced it made a profit, it was 48% less than the previous year.
AirAsia share price fell to RM3.57 at 9.04am on Aug 24 the day after the results were announced. Those involved will have to explain why the share swap was done before the 2nd Quarter results were announced.

In Part 2, I will look at MAS's problems due to the lack of a clear air transport policy and whether the share swap will resolve its financial and operation woes.

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