Question

Like many low-cost carriers, Tigerair had been hit by regional overcapacity. However, unlike Malaysia’s AirAsia and Indonesia’s Lion Air, which operated out of huge domestic markets that could cushion the impact of overcapacity, Tigerair did not have a similar advantage. This lack had translated into large losses in the past four financial years: losses of $104 million in 2012, $45 million in 2013, $223 million in 2014, and $264 million in 2015.

SIA’S INITIAL OFFER

On November 6, 2015, SIA launched a takeover offer for Tigerair at $0.41 in cash per share, a premium of 32 per cent over Tigerair’s closing price of $0.31 on November 5, 2015. In addition to the cash component, Tigerair’s shareholders were given the option to subscribe for SIA shares at $11.1043 per share—a 0.4 per cent discount compared to their closing price of $11.15 on November 5.

At the time of the offer, SIA was Tigerair’s largest shareholder with a stake of 55.8 per cent. SIA confirmed that the intention was to delist and privatize Tigerair. The offer was conditional upon SIA owning more than 90 per cent of Tigerair at the close of the offer period. The offer, which would be funded through SIA’s internal cash resources, valued Tigerair at $1.02 billion. Tigerair’s shareholders had until December 28, 2015 to accept.

SIA’s chief executive officer, Goh Choon Phong, stated, “[Tigerair’s] success is closely linked to it being part of the SIA Group through our portfolio strategy, in which we have investments in both the full-service and low-cost aspects of the business.”7 He added that Tigerair had “done well” by restructuring to improve its financial position, but “its development potential [was] limited without deeper integration with the SIA Group to build a strong foundation for growth over the long term.” He explained, “We believe our offer to [Tigerair’s] shareholders is compelling as a significant premium is being offered, and [we] hope that it will be considered favourably.”

However, the president and chief executive officer of the Securities Investors Association, David Gerald, noted that the offer price was 39 per cent lower than what long-term minority shareholders had paid.8 He said, “A [Tigerair] shareholder, who held on to IPO shares that were bought for $1.50 a share, and subscribed to all three rights issues since the IPO, would have paid an average of $0.67 a share.” Gerald urged Tigerair’s board to ensure that minority shareholders received a fair return.

SIA’S REVISED OFFER

By the deadline of December 28, 2015, SIA had only managed to secure 74.5 per cent of Tigerair, which was short of the 90 per cent required to delist and privatize the low-cost carrier. Accordingly, SIA extended its offer to January 8, 2016.9

On January 4, 2016, SIA confirmed that it had 77.48 per cent of Tigerair’s shares—still short of the 90 per cent needed. The offer was increased to $0.45 per share, and the deadline further extended to January

2016.10 This offer was a 45 per cent premium to Tigerair’s closing price of $0.31 on the day before the takeover bid was announced, and valued the budget airline at approximately $1.125 billion.

Goh said, “[Tigerair’s] independent financial advisor and independent directors had already recommended that shareholders accept based on the initial offer price of $0.41, which we considered to be compelling, [considering] the significant price premium that was being offered.”11 He added that the new offer price would not be revised further: “We are optimistic that with this final upward revision of the offer price, those shareholders who have not already accepted the offer will consider it favourably.”

According to the Securities Investors Association Singapore, some shareholders were not satisfied with the improved offer because it was still below what long-time shareholders had paid. The association acknowledged that shareholders had the option not to accept the offer, but cautioned that if SIA managed to achieve over 90 per cent, Tigerair would no longer be listed, and shareholders would find it difficult to sell their shares. Under the Singapore code on take-overs and mergers, investors would have an additional three months to tender the shares, and SIA would have to honour the original offer price.12

THE OFFER BECOMES UNCONDITIONAL

As of January 8, 2016, SIA had acquired 79.22 per cent of the shares of Tigerair. On January 11, 2016, SIA announced a further extension of the deadline to February 5, 2016, and changed the offer from conditional to unconditional.

Goh addressed Tigerair’s shareholders:

We wish to thank . . . shareholders who have already accepted the offer. With the offer being declared unconditional, we are providing certainty that these shareholders will be paid the final offer price of $0.45 for their shares within 10 days. Shareholders who accept the offer from today up to the closing date will also receive payment at this final offer price, and be granted the option to subscribe within 10 days of tendering their acceptance.13

VALUATION

Based on Tigerair’s past financial performance (see Exhibits 1, 2A, and 2B), what would be a reasonable valuation of each of its shares as at February 4, 2016? For a discounted cash flow analysis, some growth projections would be necessary before a reasonable terminal growth rate could be applied in perpetuity. For a dividend discount model valuation, the dividends could be ascertained by applying a payout ratio on the projected net income (see Exhibit 3). Finally, for a relative valuation analysis using peer comparison, data had been collected but a suitable peer group had yet to be identified (see Exhibit 4). The share price performance of Tigerair, from its listing in January 2010, did not compare well with industry peers (see Exhibits 5 and 6).

The recent share prices of Tigerair and SIA, and the level of the Straits Times Index from November 2, 2015 to February 3, 2016 had also been collected (see Exhibit 7).

Should minority shareholders accept SIA’s latest offer of $0.45, given that the long-term average price was $0.67 per share? Should the share valuation take into account synergies that might result from the acquisition? Should minority shareholders exercise their right to buy SIA shares at $11.1043?

Please answer the following question from the information listed above

. Should the share valuation take into consideration synergies resulting from the acquisition?

Answer 1

Q.Should the share valuation take into consideration synergies resulting from the acquisition?

Answer: synergies benefits resulting from the acquisition should be taken into consideration while calcuating the value of shares.

Synergy can be categorized into two forms: operating synergy and financial synergy.

1.Operating synergies create strategic advantages that result in higher returns on investment and the ability to make more investments and more sustainable excess returns over time. Furthermore, operating synergies can result in economies of scale, allowing the acquiring company to save costs in current operations, whether it be through bulk trade discounts from increased buyer power, or cost savings by eliminating redundant business lines.

In present case Tigerair having (oparating) overcapacity by utilising it and minimizing the cost from controlling the value chain more comprehensively SIA'S may enable to increse its profit (or convert loss making tigerair company into profit making company).

Therefore while calculating the share value operating synergies resulting from acquistion should be taken into consideration.

2.Financial synergies refer to an acquisition that creates tax benefits, increased debt capacity and diversification benefits. In terms of tax benefits, an acquirer may enjoy lower taxes on earnings due to higher depreciation claims or combined operating loss carryforwards. Second, a larger company may be able to incur more debt, reducing its overall cost of capital. And lastly, diversification may reduce the cost of equity, especially if the target is a private or closely held firm.

In present case Tigerair making huge losses during last four years,

2012- Loss $104 Million

2013-Loss $45 Million

2014 -Loss $223 Million

2015- Loss 264 Million

#SIA'S getting tax benefit for the losses of Tigerair agaist its own profit as it become's part of group company after acquistion.

#Worth of the SIA's Incresed after acquistion of tigerair.

#effective Utillisation of resourses having with SIA's

Therefore while calculating the share value financial synergies resulting from acquistion should be taken into consideration.

In the present problem

SIA’s chief executive officer, Goh Choon Phong, also stated

# success is closely linked to it being part of the SIA Group through our portfolio strategy, in which we have investments in both the full-service and low-cost aspects of the business.

it is nothing but financial synergies and operating synergies he is expaining.