KUCHING: Malaysia Airports Holdings Bhd (MAHB) had recently announced that has exercised its right of first refusal (ROFR) to acquire the remaining 40 per cent stake in Istanbul Sabiha Gokcen (ISG).
Analysts believe, given the increased gearing ratio derived from ISG’s debt, the company will likely fund the acquisition via mix of bank borrowings and capital market transactions (private placement and/or rights issue).
Recall that earlier last month, TAV Holdings Airport’s (TAV) announced its share purchase agreement with Limak Holding (Limak) for 40 per cent of ISG. However, the transaction was subject to ROFR granted to MAHB, which already owned 60 per cent stake of ISG.
Last month, analysts were cautious over the event as while TAV is not an ideal partner for MAHB in terms of running ISG, MAHB also runs the risk of breaching its debt covenant of not more than 125 per cent gross debt-to-equity, should it fully acquire ISG.
Nevertheless, the funding details have not yet been finalised. According to Affin Hwang Investment Bank Bhd’s research arm (Affin Research), upon the acquisition, MAHB will have to consolidate ISG’s debt (420 million euros as at December 31, 2013), as well as raise 285 million euros funding (RM1.1 billion).
“Assuming full debt funding, ISG’s debt consolidation as well as estimated acquisition related expenses of RM47 million, MAHB’s gross gearing level would increase to 1.22-folds (higher than our earlier estimate of 1.18-folds).
“Total debt level will increase to RM6.9 billion (from RM3.8 billion currently). The proposed acquisition is expected to complete in the first quarter of 2015 (1Q15),” it said.
Affin Research viewed, “Given that MAHB has to comply with the debt covenant of a 1.25-folds gross gearing ratio and a gross gearing ratio of one-fold to maintain its AAA rating, we believe funding will likely be done through a mix of bank borrowings and capital market transactions (private placement and/or rights issue).”
In a separate note, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) said, there could be a potential rights issuance rather than placement to facilitate the entire acquisition, given that gearing could hit 1.22-folds should it is financed solely through debt leaving minimal headroom for MAHB to maintain its debt covenant whereby gearing should not exceed 1.25-folds.
It noted, MAHB had earlier raised RM980 million in March 2014 via new issue of securities for the funding of the additional 40 per cent stake in ISG and LGM, previously.
“Nonetheless, we are neutral on the move taken by MAHB to acquire the remaining stake in ISG and LGM despite Sabiha Gocken Airport’s long-term growth potential and other potential spill over effects from the capacity constraints in Ataturk Airport, as the political risk in Turkey remains highly uncertain coupled with the recent ISIS crisis in Turkey,” it viewed.
Meanwhile, CIMB Investment Bank Bhd’s research arm (CIMB Research) viewed, the acquisition is likely to be funded either via the issuance of new common shares or a combination of perpetual sukuk and common shares.
However, it noted, “Funding the purchase entirely with perpetual sukuk could leave MAHB at risk of losing its AAA credit rating, so this will most likely be ruled out.
“MAHB’s share price has already priced in the potential cash call and earnings per share (EPS) dilution from the ISG acquisition, in our view.”
Target price dilution would be less severe if it decides to fund half of the acquisition with perpetual sukuk, with the research house’s target price declining to RM6.98 per share, it added.
“EPS dilution is definitely a valid concern, as MAHB’s increased share of ISG’s losses and a higher share base may lead to EPS dilution of 18 to 24 per cent.
“MAHB is expecting ISG to break even in FY15. If it proves to be right, the EPS dilution will be less worrisome, as profits from ISG would partially offset the higher share base,” it commented.