Mumbai/New Delhi: A key minority investor in Deccan Aviation Ltd that runs an eponymous discount carrier says the firm will merge into privately-held Kingfisher Airlines Ltd, an aviation company of the UB Group, which already controls 46% of Deccan, soon.
Shares of Deccan rose to Rs254.75 on Tuesday before ending the day at Rs248.45, 18% more than the previous day’s close, on the National Stock Exchange. Nearly 14 million shares of Deccan changed hands on Tuesday, several times the average 1 million volume the company’s counter saw each trading day in November. The identity of the buyers could be immediately ascertained.
“Deccan has got a fresh lease of life with better performance parameters. It will shortly amalgamate with Vijay Mallya-promoted Kingfisher Airlines for better operational synergy,” said the minority investor, who added that the reverse-merger could take place within six months.
The investor, who together with associates controls more than one-10th of Deccan Aviation shares, said he preferred not to be named.
Several investors are interested in investing in Deccan, “but no promoter is willing to sell”, he said. “Nobody would want to sell when the airline is about to make profits in the next six months.”
The Bangalore-headquartered UB Group, chaired by billionaire businessman Mallya, which increased its initial 26% stake in Deccan to 46% recently, had earlier said that it intends to increase its equity to 51%. But on Tuesday, its chief financial officer said no merger was in the offing.
“I have not spent even one minute of time even considering any corporate change (since acquiring a stake in Deccan),” said Ravi Nedungadi, UB Group’s CFO. “Nothing has changed; our focus remains on rebranding. I would be very surprised” if there is a corporate change by the end of the year, he said.
Shares of Deccan had surged more than 23% on Tuesday last week, with analysts and industry insiders speculating a reverse merger into full-service carrier Kingfisher Airlines. On Tuesday too, analysts said the stock surge was driven by rumours. “The fundamentals of the business haven’t changed at all, so to a large extent a lot of the share movement has to do with the rumours of a merger,” said Surbhi Chawla, analyst at Angel Broking Ltd.
The recent volatility in the Deccan counter is a repeat of similar movement in its share price in May this year, when market speculation of a possible investment by the Reliance-Anil Dhirubhai Ambani Group led to a 20% jump in the Deccan scrip in one day.
A so-called reverse merger in which Deccan Aviation will merge into Kingfisher Airlines at an independently set out swap ratio of shares, thereby allowing investors of the first firm to also own shares of the unlisted UB aviation unit, is “the most logical thing to do”, another aviation expert said. “Reverse merger is not unheard of in the aviation space; they do it to make the bottom line look good. In the case of Kingfisher and Deccan…restructuring would lead to better profitability,” said Mark Martin, analyst at KPMG International’s New Delhi offices.
In 2002, for instance, suffering massive losses after the 9/11 terror attacks in New York, UAL Corp.’s United Airlines Inc., the second largest US carrier, restructured its business by hiving off a major chunk of its business into a low-fare carrier called Ted, to underwrite losses of the holding company. This led to lower operating costs for the subsidiary company and “they are doing well today”, Martin said.