The swap ratio for Kingfisher Airline Ltd’s merger with Deccan Aviation Ltd looks favourable to the latter’s minority shareholders. Deccan’s market capitalization stood at Rs2,340 crore just prior to the announcement of the swap ratio. According to Mint estimates, based on various news reports, Kingfisher’s shareholders will be issued 120 million Deccan shares, worth Rs2,075 crore. In other words, Deccan’s equity is valued about 13% higher than that of Kingfisher’s.
The markets have taken this as evidence that the swap ratio favours Deccan shareholders, especially keeping in mind that Kingfisher’s revenues are estimated to be higher this fiscal year. The company’s shares rose 4% on Friday, while those of Kingfisher-promoter, United Breweries Holdings Ltd, fell about 3%. But that conclusion may be a little simplistic. A fair comparison can be made only if the debt position of both companies is known.
The higher the debt, the lower the value of equity and vice-versa. Officials of both companies didn’t respond to queries about their debt position.
In terms of revenues, Deccan Aviation currently has annual revenues of Rs2,100 crore, while the merged entity is expected to have revenues of Rs5,400 crore. Minority shareholders (shareholders other than the UB Group) currently own a 51% share,; in other words, they are entitled to revenues worth Rs1,070 crore. Post-merger, they’ll have a stake of 31% and would be entitled to Rs1,675 crore worth sales.
While this represents a big jump, what matters more is the net profit that is attributable to equity shareholders. If operating margins at Kingfisher are lower and its debt is higher, the profit contribution to shareholders could well be lower than that of Deccan. Currently, both companies are loss making; so, the losses attributable to shareholders could well be higher than those of Deccan.
Unless detailed financials of Kingfisher Airlines are known, a reasonable assessment of the merger and the swap ratio is not possible. It’s unfortunate that Deccan shareholders are still in the dark.
What’s most interesting about Microsoft Corp.’s takeover bid of Yahoo Inc. is its timing. Yahoo has fallen about 43% from its peak in late October and is at its lowest level in over four years. Microsoft shares on the other hand have hardly budged in comparison. It’s fallen about 11.8% from its peak in early November.
Given that a large part of the proposed transaction is in the form of a share swap, the timing couldn’t be better for Microsoft.
HDFC’s rate cut
Housing Development Finance Corp. Ltd’s (HDFC) 25 basis point rate cut is significant because it’s the first time they’ve cut rates since 2003. It’s yet another indication of ample liquidity and the impact of the fall in long-term bond yields.
To be sure, a 25 basis point rate cut will hardly be an incentive for borrowers to rush to buy homes. Analysts say it’s likely to be a tactical move, aimed at garnering market share for HDFC.
HDFC’s outstandings on account of individual loans went up 23.4% compared with the year-ago period during the June quarter, 23.1% in the September quarter and 21.7% in the December quarter.
Clearly, there has been a deceleration in growth in the housing market, especially in loans to individuals. Reserve Bank of India (RBI) data show that the rate of growth of housing finance loans, on a year-on-year basis, was 15.1% as on 23 November 2007, compared with a year-on-year growth rate of 33.4% on 24 November 2006.
However, ABN Amro Bank senior economist Gaurav Kapur points out that it’s unlikely to lead to a spate of rate-cutting by banks. With RBI cracking down on the recovery practices of some banks in credit cards and personal loans, it’s likely that credit norms will be tightened in those segments. That could lead to banks preferring to concentrate on housing finance, which is in any case the safest option among personal loans.
But as Kapur points out, banks are unlikely to cut rates unless they get a clear signal from RBI. And it’s by no means certain that the central bank is in any hurry to either reduce the policy rate or lower the cash reserve ratio. That’s because the base effect keeping the inflation rate relatively low will disappear in April.
There are also signs that capacity constraints are biting in industries such as cement, which means more liquidity will translate into higher prices. While rate cuts by the US Fed will add to the pressure on RBI, the HDFC rate cut may not mean the beginning of a revival in housing finance.
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