Deccan Aviation to merge with Kingfisher Airlines

According to CNBC-TV18's Raja Rajeshwari the management spoke yesterday evening about why it makes immense sense for them to go together. Topping it would be the operational efficiencies which they've been unable to get. They have been unable to materialise the Rs 400 crore odd that they said would be the operational efficiencies immediately, largely because there was always a choice between Kingfisher or Deccan, she added.

Hence, according to her, making it into one single entity now, they will be able to rationalise on manpower, routes and time buckets thereby, making a bit more profitable than what it was.

She added, "We also heard the management come and talk about their fund requirements, and now it becomes easy as they will attract a financial investor to come into the single, combined entity that it will become right now."

However, the stock has reversed its fortunes. Today it is up in the green, but it is not getting a complete thumbs up largely because it has run 100% over the past one month. This has put it on very lofty valuation of about Rs 8,000 crore as its enterprise value right now as things stand. That would be close to three times its EV to sales.

Rajeshwari said that when compared to its Indian peers one saw that Jet is trading at close to two times EV to FY08 sales, SpiceJet would be trading close to 2.5 times EV to sales. So, Deccan is already enjoying premium valuations. However, she added, it would be at par with some of the Asian peers, but that is of course on an FY07 basis. British Airways is trading at 3.9 times EV to sales, Air France at 3.2 times, Ryan Air at 4.8 times, and Air Asia at 4.7 times. So, they are similar numbers on an FY07 basis, and Deccan will be at par with these Asian giants.

So, at this rate, what would be the valuation that one would give to Kingfisher? Ravi Nedungadi, CFO & President- Finance, UB Group said that they are targeting close to Rs 3,000 crore odd as revenues for FY08. According to Rajeshwari, if one takes that figure and gives two times EV to sales, then one can look at an enterprise value of Rs 6,000 crore odd for Kingfisher with Deccan already commanding Rs 8,000 crore.

And where does the share swap ratio come? That would be the key point that most analysts would be watching out for, Rajeshwari feels. Whether Deccan is justified at this rate or do they value it lower, are they going to do valuations on an asset basis or aircraft or profitability basis - both are non-profitable organizations - more clarity will come in the next 3-4 weeks when accountants and KPMG put their heads together and do the valuations.

So can one hazard a guess on what the swap ratio would be like on the basis of what the management has already said or would it be too early to preempt that? "It will be too early to preempt it", Rajeshwari said adding that they have done it on an EV to sales basis right now, and it works out to close to either 1 Deccan for 2 of Kingfisher, but that is not the scientific method.

She added that they have spoken to the management and asked them what their thought process would be. However, they said that they don't want to preempt what the accountants or KPMG want to put it at. "I also spoken to a lot of people as to how to go about it. There are various schools of thought. They say they'll do it using proper valuation methods. They will be privy to more information than we are. Only off late we have started getting, what could be FY07 sales or what is going to be FY08 sales. We need to get more details of what the asset is going to be, what will be the aircrafts delivery, do the future projections, get the cost per unit, project it and then take it forward from there," Rajeshwari explained.