A little slow to the boat, as I have only been a curious onlooker to the whole SIA-Tigerair takeover affair thus far. SIA made a 41 cents offer on 5th November to privatise Tigerair, a 32.3% premium to the budget carrier’s 31 cents closing price. This Wednesday, the Straits Times published an article, “SIA offer for Tigerair ‘not reasonable’, says SIAS”. While I value the work that SIAS does for minority shareholders, I respectfully disagree with the arguments raised by SIAS president and chief executive David Gerald in the article.
Anchoring bias and sunk cost
The 2 main arguments of SIAS are as follows:
SIA bought out Temasek's 7% stake in Tiger Airways at $0.678 (Temasek owns 57% of SIA). Minority shareholders also approved a whitewash waiver for SIA in 2013 to allow SIA to become controlling shareholder without making a mandatory general offer. At that time, SIA bought perpetual convertible securities that were eventually converted to shares at S$0.565 per share in 2014.
A Tiger Airways' shareholder, who held on to his IPO shares that was bought for $1.50 a share and subscribed to all three rights issues since IPO would have paid an average of $0.67 a share. The offer price is 39% lower than what long term minority shareholders paid. This offer, the minority feels, is not reasonable.
The first argument centers on the premise that the existing offer is unreasonable because a past offer was higher. This rationale is only valid if past market/company conditions are proven to be better than the current. This assumption has not been qualified, or even addressed, in the course of the argument. Most importantly, the assumption does not hold in Tigerair's case, as we will elaborate later in the subsequent section.
On the second argument, does the share price paid by minorities in the past have any bearing on the reasonableness of the current offer? The price paid is a sunk cost, a done deal. Making a decision based on a historical price paid is a form of anchoring bias.
The reasonableness of the current offer (and any investment decision for that matter) hinges on the present value of the company, after incorporating for expectations of future earnings. The past is irrelevant here. If an investor expects a company to implode in the future, it is hardly reasonable for the said investor to demand a hefty valuation now, regardless of what he has paid in the past.
Valuations and market conditions
Both arguments point to the need to evaluate the valuations and market conditions of Tigerair. This has been acknowledged by SIAS.
While SIAS understands that the current market conditions are different, nevertheless, the minority shareholders' interest must be taken into account.
However, SIAS fails to give the consideration its due regard. To determine whether the SIA offer is reasonable, we need to know what a fair value is for Tigerair now. A brief glance at the financial performance of Tigerair will give us a good idea.
Revenue has declined since 2013 and Tigerair has been making losses since 2012. Net asset value has been a mixed bag, but it has only been propped up by increased equity injections as indicated by the steady increase in common stock value. Without increased capital injections by equity holders, net asset value would be negative. Clearly, the core business of Tigerair is haemorrhaging.
Alas, I will be shooting myself in the foot if I do not pay heed to future expectations of earnings. After all, operating losses did reduce from SGD41.7mn in 1H15 to SGD9.9mn in 1H16. What future earnings are required for the implied valuations of the current offer to be fair?
At 2.5bn outstanding shares for 41 cents apiece, SIA's offer values Tigerair at c.SGD1.0bn. According to Bloomberg, SIA has a forward PE of around 19.4x. Based on the same valuations, Tigerair has to make SGD52.8m in profits annually to justify the current offer price. This seems to be a tall order, especially when Tigerair has never seen such profitability in its entire listing history.
The value of a loss-making company is not zero. If one expects Tigerair to remain as loss-making, a suitable metric would be its price to book. To put things into perspective, SIA trades at 0.98x price to book. It is also uncommon of a loss-making company to trade at a premium to book. In its latest quarter filings, Tigerair has a net asset value of SGD209.2mn, giving an implied price to book of about 5x.
I did not go into great detail in the analysis of the company and market conditions (because you know, exams), but the broad strokes suggest that SIA's current offer is indeed reasonable, if not generous.
SIAS' noble intention has always been to ensure the fair treatment of minority shareholders. As a minority myself, it is a mission that I both value and appreciate. However, objectivity should always be maintained. Fairness should not translate into privilege. Incurring losses is always painful, but it is part and parcel of being in the market. There are always risks to rewards and no one is guaranteed a free lunch.
I am open to the idea that SIA's offer is unreasonable based on arguments of valuation and market conditions – my evaluation is far from thorough. But, in my view, arguments based on the extent of losses to minorities provide little value in any objective discussion.