King of mergers

UB Holdings has got a good deal in Deccan Aviation.

At an enterprise value to estimated FY07 sales (EV/sales) of 1.53, UB Holdings has got a good deal in Deccan Aviation. Jet Airways had paid a little less for Sahara at an EV/sales of 1.3 but then UB Holdings has managed to take effective control of Deccan by buying just 26 per cent of the equity now and up to 46 per cent, depending on what it gets from the 20 per cent open offer. Jet Airways, on the other hand, was compelled to buy out 100 per cent of Sahara's equity and even in the second round of negotiations, the valuation was not much lower.

Also, Deccan Aviation with a market share of 18 per cent, a modern fleet and an improving brand image is in a far better shape than Sahara was with just an 8 per cent share and an older fleet.

The synergies that can be harnessed from the combine, even if the two airlines (Kingfisher and Air Deccan) operate separately, are plenty: both operate Airbus, so there would be savings on engineers and spare parts.

The duo will be in a stronger position now vis-a-vis lessors, aircraft manufacturers (Airbus in this case) and will spend less on training and employees.

The savings on costs could be lower by about 4-5 per cent. On the revenue front, a more optimal route strategy, which avoids cannibalisation of passenger traffic, should result in a rationalisation of fares translating into revenue gains over time. With losses of over Rs 200 crore in the December quarter, Deccan is not out of the woods yet. The near term upside appears to be priced into the stock at the current price of Rs 145.