Who is bigger - Tony or AirAsia?

Considering that the share price now is at 2 ringgit each, certainly, there would be queries at the upcoming shareholders’ meeting that would deliberate on the proposed placement to the founders – Tony Fernandes and Kamarudin Meranun - and not all the shareholders.

 

Assuming the share price continues its uptrend and sails well above the placement price of 1.84 ringgit (if adjusted for dividends, the price would go down to 1.80 ringgit), the beneficiaries of the placement shares would be sitting on a tidy sum of paper profit.

 

On this score, the placement looks favourable to the founders Fernandes and Kamarudin.

 

So, therein lies the reason why the AirAsia shareholders’ meeting to deliberate on the proposal could be an interesting affair.

 

The proceeds from the proposed placement is 1 billion ringgit. If the exercise is to send a signal of confidence to the market that the founders are prepared to fork out such a large sum to go into the low-cost carrier as they believe in the business model, then the message has been well-received. It is obvious from the buoyant share price.

 

However, there are other ways that the founders could have opted to send a sure sign to the market that they are in the airline for the long term.

 

The conventional method would be to mop up the shares from the open market.

 

But it may cost them much more than 1 billion ringgit to raise their stake to a fairly significant amount from the current 18.9%. This is because institutional funds and retail investors would start chasing the shares upon seeing the founders purchasing them from the open market.

 

Another hitch to an open market purchase would be the uncertainty that Fernandes and Kamarudin would get the required number of shares to raise their stake from the current 18.9 per cent to 32.4 per cent - the equity stake that the duo would have after the placement exercise.

 

Lastly, an open market purchase of shares would not benefit AirAsia as it would not get fresh funds.

 

The board of AirAsia has stated that the reason why it opted for a placement instead of a rights issue is because the former brings about certainty and there is no need for an underwriter. It also said that a US$1 billion multi-currency facility proposed in January was not feasible.

 

However, there is an argument that AirAsia does not need the money, as the low crude oil prices have resulted in the airline’s profits and cash flow soaring. In a nutshell, there is a view held by some that AirAsia’s debts of about 12.6 billion ringgit as at the end of last year are manageable.

 

But the view was very different a year ago.

 

When the ringgit skidded against the US dollar, AirAsia’s share price fell to a low of 78 sen. It was perceived that the airline’s debts would be unmanageable because they were largely denominated in US dollars while the bulk of AirAsia’s earnings were in ringgit.

 

The irony is, if the placement is completed, the debts would reduce to 12.3 billion ringgit, which is not very much lower compared to the present amount of 12.6 billion ringgit.

 

So, fears that AirAsia’s debts were insurmountable a year ago and is not the case now does not really hold water.

 

But what would matter is if the ringgit starts to weaken against the US dollar, which may happen in the second half of the year. then AirAsia’s shares would once again come under pressure, especially if the oil price starts to move up.

 

Such pressure could expose AirAsia to other vagaries apart from its business itself.

 

One reality is that it could even be a takeover target as the founders, who are also the prime movers of the airline, only own 18.9 per cent.

 

Having said that, if Fernandes and Kamarudin propose a placement exercise during a low price environment, they would come across as trying to purchase the shares cheap.

 

The proposed placement would raise the stake of Fernandes and Kamarudin to 32.4 per cent, an equity stake that would put them firmly in control against any possible takeover when the operating environment in the cut-throat airline industry goes bad.

 

A shareholding of 18.9 per cent is just too small for the founders, who are the main drivers of AirAsia, to be comfortable. It is vulnerable to a takeover if there is a downturn in the airline industry and things go bad for AirAsia.

 

Therein lies this question: Can AirAsia survive without Fernandes and Kamarudin?

 

It is something shareholders could ponder.

 

AirAsia depends on the duo for overall direction and they have a track record that proves their capabilities. Fernandes is smooth with the marketing of the airline, while Kamarudin is known to be a shrewd negotiator in getting the best financing deals.

 

They have a proven track record of navigating the airline through several crises and gyrations in the oil prices.

 

This may be one reason why shareholders would vote for the proposal, although there would be some serious deliberation at the meeting to discuss the placement.

 

One of it could be why Tune Air, which is their holding company, is disposing its stake in the market at about RM2 prior to the AGM? It does not look good for them to get placement shares at 1.84 ringgit when Tune Air is reducing its stake at 2 ringgit.

 

To be fair, in announcements to Bursa Malaysia, Tune Air has stated that the shares disposed were in favour of Datuk Abdul Aziz Abu Bakar, who is one of the founders of AirAsia.

 

The placement is being done to Tune Live Sdn Bhd, a company that is equally owned by Fernandes and Kamarudin only.

 

Some shareholders, however, would wonder why Fernandes and Kamarudin did not buy the shares from Aziz.

 

This is something for them to answer. Nevertheless, it should not derail the proposed placement to the founders.