SIA's costly lessons in mergers and acquisitions

PHOTO: SIA's costly lessons in mergers and acquisitions

The sale of Singapore Airlines' stake in Virgin Atlantic caps over a decade of mainly failed attempts by the airline to grow its equity portfolio.

So one key question shareholders will be asking SIA's top brass is: How much of the company's shareholder value has been needlessly destroyed?

Last Tuesday, SIA ended weeks of speculation by announcing that it would sell its 49 per cent stake in Virgin Atlantic to Delta Air Lines.

Delta will pay US$360 million (S$439 million), only a fraction of the £600 million (then S$1.6 billion) that SIA paid for the stake in 2000.

The other big regret for SIA was in 2004, when it sold its 6.3 per cent stake in Air New Zealand for NZ$61.7 million.

SIA had paid a total of NZ$426 million for a quarter of the Kiwi carrier in 2000, shortly after it struck the deal with Virgin.

"A simple calculator will tell you how much shareholder value they have burned. This is not an area they have a proud record of," said Mr Timothy Ross, the head of Asia-Pacific transport research at Credit Suisse.

To be fair, the ventures made strategic sense, said Mr Amartya De, a senior consultant at Frost & Sullivan.

Virgin came with the promise of a chunk of the growing European and United States market.

A stake in Air New Zealand, which co-owned the now-defunct Australian carrier Ansett, gave SIA a piece of the lucrative traffic flow between the mature markets of Australia and New Zealand, and Europe.

The question, however, is whether enough was done to protect and secure SIA's long-term interests before signing on the dotted line, analysts said.

Mr Hugh Young, managing director of Aberdeen Asset Management Asia, said: "SIA should have been very careful about getting into bed with (Virgin Group chairman) Richard Branson, who is known to be notoriously difficult to work with."

The hope was that SIA was going to be able to forge a direct pipe across London to New York, leveraging on Virgin's aircraft and slots at Heathrow. But the carriers failed to achieve any real synergies, he noted.

The question then is whether all these details had been hammered out before the deal was sealed, analysts said.

It did not help that soon after, the global passenger aviation industry was hit by the Sept 11, 2001 terrorist attacks in the US and, following that, the severe acute respiratory syndrome (Sars) epidemic.

Since then, Virgin has struggled and in the year to the end of February, it posted a pre-tax loss of £80.2 million (S$158 million).

As for Air New Zealand, SIA was badly burnt when its 25 per cent stake shrank to just 6.3 per cent after Ansett collapsed in 2001.

The New Zealand government stepped in with a rescue package and acquired majority ownership of its flag carrier.

In hindsight, SIA could have worked out a deal with the Kiwi carrier to protect its interests in the event of a recapitalisation, analysts said.

But even as there are lessons to be learnt, the reality is that aviation is a "nightmare" business, noted Mr Young. The Virgin and Air New Zealand ventures "would have killed any other weaker airline", he said. 

And to some extent, SIA's struggle to spread its wings only reflects the same tough challenge airlines face in making merger and acquisition deals.

An attempt by the Singapore carrier in 2008 to buy into China Eastern failed when minority shareholders led by Air China rejected SIA's advances.

Given the current slowdown in China, Mr Ross said: "In hindsight, I think they are rather glad they did not get it. It was a lucky break."

The only equity deals that have really worked have been between carriers within a single economic bloc or country - Air France and KLM, for example, or Northwest and Delta, analysts said.

SIA's shareholders can only hope that the lessons learnt in the past decade will help the airline make more of future relationships that it will have no choice but to forge, given tough operating conditions and keen competition today.

In October, SIA bought 10 per cent of Virgin Australia for about A$100 million (S$129 million). Virgin in turn will buy a 60 per cent stake in Tiger Airways Australia, of which SIA owns about a third.

For now, it may have to face the ire of shareholders like retiree Denis Distant, 75.

There is talk of a special dividend that may be paid to shareholders out of the $322 million gain from the sale of Virgin Atlantic, but this is no consolation.

"First you pay $1.6 billion, then you write it down to nothing. Now you sell it and say you have a $322 million gain. It's all accounting," Mr Distant said.