Airline ground handler and food catering services provider Sats has released more details about its funding plan for its EUR1.2 billion ($1.7 billion) acquisition of global cargo handler Worldwide Flight Services (WFS).
The final funding plan comes to $1.8 billion and will consist of $800 million in a renounceable underwritten rights issue, a $700 million term loan, and $320 million from the company’s existing cash.
The equity raising exercise is expected to be launched in the first quarter of 2023 but will be subject to “conducive market conditions” and regulatory approvals. When asked what happens if the market is not conducive to launching the rights issue, Sats chief financial officer Manfred Seah said at a briefing on Dec 1 that the company will wait for a better time but stressed that the important thing for shareholders is to vote at the upcoming EGM whether they are in favour of the WFS transaction.
The company will then look at the right time to launch the rights issue, although he added that the company would prefer that these two processes are “not too far away from each other”. Seah adds that “the transaction is not conditional on the fundraising”, as Sats has a EUR1.2 billion bridging loan on standby to cover the acquisition cost to ensure the transaction is completed. The bridging loan, he explains, is to give Sats the flexibility to design a funding mix that can fund this acquisition long-term.
At the briefing, the company did not disclose the rights issue ratio or its issue price - details investors are looking for as they brace themselves for what might be a dilutive cash call. Seah, on his part, points out that “massive discounts” are only levied on rights issues when a company is in a distressed situation and that “Sats is not in such a situation.”
State investor Temasek — a majority Sats shareholder with a 39.68% stake —has given an irrevocable undertaking to vote in favour of the transaction and to subscribe to its full entitlement to the rights issue.
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Directors of Sats who are shareholders have also indicated that they will subscribe to their entitlement to the rights issue. The remaining 60% of the rights issue is envisaged to be underwritten by banks, which Seah did not name.
The term loan of $700 million, says Seah, will be Euro-denominated, with all-in interest costs of between 4% to 4.5% per annum, based on the prevailing Euribor. This is comparable to the company’s existing borrowings, he adds. Euribor refers to the Euro InterBank Offered Rate, the price at which European banks lend money to each other.
Seah adds that as the transaction is done in euros, therefore, the term loan is euro-denominated so as to match assets and liabilities. Even by taking this loan, the company’s debt level would be kept at a “reasonable level”, which it can service, given how the combination of Sats and WFS is “cash generative”.
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He acknowledges that at the outset, the company’s debt-to-equity ratio will be elevated, but the company will be able to de-leverage its balance sheet within a reasonable period and keep its “investment grade” rating.
Before the pandemic, Sats was known for its relatively steady dividend payouts of about 70% to 80%, according to UOB Kay Hian analyst Roy Chen in a Nov 10 report. That is now on hold as the company tries to recover from the pandemic. Assuming the company takes on more debt, shareholders face the prospect of the dividends not resuming to pre-pandemic levels, even if, operationally, Sats does.
This view is shared by Chen, who thinks that the company is likely to moderate its dividend payment and utilise more of the surplus operating cash flow to pare down the debt. Nomura analysts Ahmad Maghfur Usman and Divya Thomas add: “Given the increase in gearing post the new term loans, we think the company may reduce dividend payout in the future.”
In response, Seah says that the dividend payout will resume as soon as the company is back in the black and “this acquisition is not going to change that”. Sats shares closed Dec 1 at $2.75, 29.31% down year to date.
