Is SATS Playing a Dangerous Game?

At first glance, SATS/WFS looked like a sound deal, and a boost to SATS' revenues and profits. Then why is the shares still trading so low?

This is bad. I mean, the SATS/WFS buyout was just poor communication to shareholders.

SATS’ shares plunged 20% in a day after announcing that the WFS deal was an “all-equity financing” deal in Sep. 

This meant SATS shareholders would have to fork out the entire S$1.7 billion sum. 

Well, it turned out that wasn’t the case. Later on, SATS clarified the buyout would be a mix of equity, debt and cash.

The funny thing is though, why hasn’t SATS shares recovered? 

Disclaimer — I’m no longer a shareholder of SATS as shared in Diligence.

At first glance, I thought SATS made a good acquisition. But I realized there’s something more about the deal.

Anyway, let’s find out what exactly happened.

SATS/WFS deal timeline — What happened?

  • 28 September: SATS announced to buy Worldwide Flight Services (WFS) for an “all-equity” funding of S$1.7 billion. Later, shares plunged 20% in a day.
  • 6 October: SATS clarified how it plans to fund the deal – mix of rights issue, debt and using its own cash.
  • 7 November: The Competition and Consumer Commission of Singapore (CCCS) accepted the SATS/WFS deal application. Now assessing if the buyout would breach anti-competition laws.
  • 9 November: SATS said rights issue will not exceed S$800 million.

First things first, Worldwide Flight Services (WFS) is one of the world’s largest air cargo handlers. 

In fact, they are the top player in North America and Europe, with over 164 stations in 18 countries. And today, has over 300 customers – including airlines, logistics and e-commerce companies. 

Air cargo handling – moving stuff from one point to another — is big business, especially during the Covid-19 pandemic, when people were stuck at home buying stuff online.

That fueled freight costs, which made WFS lots of money. In its latest 12 months financial report, WFS made a solid S$2.6 billion in revenues and S$350 million in EBITDA.

EBITDA is a proxy for a company’s operating profits, including non-cash charges like depreciation and amortization.

SATS — Why buy WFS?

On the other hand, SATS is a solid food caterer and ground handling provider, controlling an 80% market share in Changi Airport. 

However, during the pandemic, SATS suffered a massive fall in revenue and profits, since airlines were grounded — there just wasn’t any airlines who needed food catering and ground handling.

SATS, over the last two years of struggled during the pandemic, had to rethink their diversification strategy – air cargo handling. 

The thing is, the air cargo business during the pandemic was resilient. What’s more, right now, as air travel opens up, SATS could not only can take advantage of a strong air travel recovery, but also could add another profit driver in its arsenal – air cargo. 

SATS buying over WFS would push the combined company to one of the biggest air cargo player in the world (see chart below). 

Think about this: on one hand, SATS current businesses could complement WFS’s air cargo services — since SATS could cross-sell their services to WFS’s airline customers. 

On the other hand, SATS could also get an instant boost in revenues and profits, right after the acquisition. That’s the good news. 

The bad news is — why then are SATS shares still trading at a low to the buyout deal?

Is it really worth buying WFS?

The thing is, SATS has to fork out S$1.8 billion buy over WFS. 

That’s pricey. 

When WFS was put up sale, the WFS valuations was based on revenues and in the air cargo handler’s latest 12 months financial numbers. The trouble was, a closer look (in red below) showed profits had only increased massively during the pandemic. 

Before that, when freight costs were much lower.

And actually, WFS revenues tend to bounce up and down more. Its profit margins were also razor thin.

I asked myself — would WFS’s future profits be truly sustainable? I mean, if their recent profits were only due to the e-commerce boom during the pandemic, would this S$1.8 billion be a fair price to pay?

That’s not all. 

While SATS will become a bigger, more profitable company after the buyout, it will also have to pile on more debt — gearing is going to go up. And has to pay a higher interest costs than before.

Today, SATS is a different beast

What was once a great asset-light, capital-efficient business — focused on food and gateway solutions — now has to be re-looked in a different lens. That SATS has stripped off its dividend policy, will delay paying dividends, and even struggle combining the new deal with its existing one.

My thoughts — A wake-up call for SATS shareholders?

WFS’s deal price is 60% of SATS market cap of S$2.8 billion. 

SATS also has to burn through its huge cash pile accumulated over the past years. 

Even though current shareholders could subscribe to SATS rights issue at a discount, they would face a much higher share dilution if they don’t subscribe. 

It’s either you’re in, or you’re out. Again, not looking too good for investors. 

The real problem comes after buying over the company. Since I wouldn’t know whether the deal could ultimately complement SATS food and gateway businesses. 

I mean, what if this whole deal was just a lipstick on a pig? If it’s small buyout deal, fine. But buying over WFS is going to change the entire financial position of SATS.

Plus, I never liked the idea of buying a company from a private equity firm — and SATS is buying WFS from another private equity firm, Cerebus Capital. 

You never know how these deals would turn out.

Think about Buffett’s mistake when he bought Kraft Heinz from 3G Capital, a Brazilian private equity giant in 2013. Buffett paid a 19% premium on Kraft Heinz shares, only to realize Kraft Heinz had to write down heavy losses of over US$15 billion later on.

The thing is, if SAT is confident, they can recover their business, then why do they swallow such a huge acquisition? Does it mean SATS’ core business has some serious challenges we don’t know? If so, does it still mean it’s still worth investing in the current business? 

This kind of sits in the “too hard” pile for me.

Sometimes, investing can be simple. 

Willie Keng, CFA

Founder, Dividend Titan

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1 year ago

Great analysis on the SATS deal! Highlights some really important questions to think about.

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