Industry divided over Air Deccan's valuation

Is Vijay Mallya paying more for the Deccan pie? Although industry analysts are welcoming Kingfisher Airlines' stake acquisition in Air Deccan as the right move towards consolidation, investment bankers are divided over the price paid by UB Group boss Vijay Mallya, who is the chairman and CEO of Kingfisher Airlines.

Mallya has agreed to pay Rs 550 crore for 26 per cent stake in the budget carrier Air Deccan, promoted by Capt G R Gopinath.

The stake acquisition through preferential allotment would also trigger an open offer of 20 per cent.

"This is a crazy valuation. Mallya has paid substantial premium to Air Deccan for no reason. Kingfisher Airlines, which is making Rs 50 crore a month, has joined hands with Air Deccan which is making huge losses," says an investment banker.

"The UB Group has paid a huge premium to acquire Air Deccan. Mallya will also have to organise at least Rs 850 crore for picking up 26 per cent and open offer formalities. It was the same Mallya who backed out from the deal for acquiring the loss-making Air Sahara for Rs 2,000 crore," he added.

Air Sahara was later acquired by Jet Airways for Rs 1,450 crore.

A CEO of domestic airline said Kingfisher will have to pump in huge money to turn around Air Deccan.

"Though the business model of Air Deccan is low-cost, almost 80 per cent of the costs are irrespective of the airline structure. Moreover, Kingfisher Airlines will have to invest heavily to turnaround the loss-making Air Deccan," he said.

Air Deccan posted a net loss of Rs 213.17 crore for the third quarter ended March 31, 2007. The net loss for the nine-month period ended March 31, 2007 was Rs 246.50 crore.

The corresponding figures for the March quarter or nine months period were not available. In the second quarter, Air Deccan had posted a profit of Rs 9.64 crore supported by other revenues.

However, UB Group Chief Financial Officer Ravi Nedungadi told Business Standard, "It is a good deal. We are paying the right price for Air Deccan. It would make better sense to pay Rs 550 crore for Air Deccan, which has 23 per cent market share rather than acquiring Air Sahara with a market share of less than 8 per cent."

Commenting on Air Deccan's losses, Nedungadi said, "This will mark a synergy of operations between Kingfisher and Deccan. The combination of these two large airlines will wipe off the losses and make profit. Moreover, there is a consolidation in the aviation industry."

Endorses Kalpesh Parekh, head of institutional sales, ASK Securities, "This should augur well for the industry. The industry cannot afford this number of players in the industry. With this acquisition, Kingfisher will have a sizeable market and cannot effectively compete with its rival Jet Airways."