Deccan scrip soars on reverse merger talk

Merger could make Deccan the largest domestic airline

Deccan Aviation, the company that owns budget carrier Simplifly Deccan, shot up 23.3 per cent on the Bombay Stock Exchange (BSE) in a falling market on expectations that UB Group chairman Vijay Mallya may be mulling a reverse merger of Kingfisher Airlines with Deccan Aviation to enable him to fly abroad.

Both airlines denied any such move. But analysts tracking Deccan said that the airline's stock has spurted as a reverse merger will strengthen Deccan, and the value that Kingfisher will add is not factored in the price of Deccan stock today.

Kingfisher is a full-service airline and enjoys higher yields (Rs 4200-4400 per seat against Deccan's Rs 2700-2900) though its costs are also high. A merger of the two airlines could make Deccan the airline with the largest market share (28.4 per cent), piping Jet Airways' 21.5 per cent market share in October.

''The Deccan stock has flared up on rumours that the reverse merger ratio could be in favour of Deccan,'' said an analyst with a broking house in Mumbai who did not wish to be identified. ''Someone has taken a call on the stock and the spurt is not necessarily based on fundamentals,'' said the analyst.

A merger ratio in favour of Deccan, based on shareholding, looks difficult: Mallya controls a bigger stake in Kingfisher Airlines through UB Holdings, the fully-owned arm of United Breweries in which he controls 74 per cent, while UB Holdings enjoys 46 per cent of Deccan Aviation after the open offer.

But aviation experts said that Deccan can get a favourable ratio as it carries more people, has more aircraft and larger operations and market share (15.7 per cent versus Kingfisher's 12.7 per cent). Besides, Mallya has said that Deccan will break-even faster than Kingfisher despite its higher losses.

''Since Mallya has a sizeable share in both the companies, he can play around with the numbers. To stay listed, they will have to retain 25 per cent stake with the people. This could favour the share ratio in Deccan's favour,'' said an industry expert who has been tracking the airline since its inception.

''Mallya would want to bring in some major investors in the merged entity,'' added the industry expert. Jet Airways enjoys a share price of close to Rs 800 on a paid-up capital of around Rs 90 crore.

''The merged entity of Kingfisher-Deccan will have a paid-up value of more than Rs 200 crore; so the market feels the valuation should be around Rs 350-400,'' said a former CFO of an airline.

The UB Group has denied rumours of a merger. ''We are not thinking of any legal issues, but just examining how we can explore operational synergies,'' said Ravi Nedugandi, CFO, UB Group. ''We are looking at how to profitably integrate route networks, engineering and operations of the two airlines,'' he added.

But sources close to the group say the mandate to Accenture is to explore all ways and means by which the two airlines can explore the synergies and reap the benefits. So, a merger is not ruled out.

Mallya's predicament is that he will start taking deliveries of wide-bodied planes from June 2007. They are being configured to Kingfisher's specifications and he doesn't have a choice but to use Deccan to fly them abroad.

Unless, of course, the government relaxes the eligibility criteria for airlines to start flying abroad from five years to three years.

Mallya could simply use Deccan to fly abroad, without going for a merger. But he needs the merger to attract investors and money for sustaining his growth plans.