Saturday, 7 November 2015

Lesson from Tiger Airway's takeover by SIA

Image result for Tigerairways image

Singapore Airlines has made a takeover offer $0.41 per share for Tiger Airway. While it sounds like a good deal representing a 33% premium; shareholders who had “patiently” held Tiger since IPO and subscribed to every round of rights would have paid an average cost per share of $0.67 per share. For that “patient” shareholder, the acceptance of the takeover is a 38.8% negative return.

Turning back to 2010, one will remember how hot Tiger Air’s IPO was. Riding on the budget airline craze, SIA did an IPO for part of its stake in Tiger. The IPO was heavily oversubscribed (similar to a recent IPO). However, time and time again, history has shown that business fundamentals prevail and not the popularity of the IPO, the anticipated growth did not materialize and instead Tiger Airways bled massive cash. Events have gone full circle and now SIA is buying the remaining stake it does not own in Tiger for a song in 2015.

No matter how, the fundamentals of a business always prevails and airline stocks are a terrible investment unless in extremely depressed prices. It is a commodity industry where price is the main factor and yet airlines have to pay hundred of millions to continuously improve their fleet. As Richard Branson once quipped: “If you want to be a Millionaire, start with a billion dollars and launch a new airline.

For many Tiger shareholders, it may be time to reluctantly accept the offer as without the support of its strong parent (SIA), Tiger may not be able to survive.  In the short to medium term, Tiger will take delivery of s$2 Billion worth of Airbus 320 until 2025. Even though Tiger has turned around, it seems unlikely Tiger will generate that much cash by 2025 to finance the order; hence becoming a wholly owned subsidiary under SIA's wings will help it financially. A lose-lose proposition is in store for the foolish patient investor. 

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