According to an official source at the Federal Property Management Agency, on March 13, an auction to sell off a blocking stake in Siberia Airlines will be called off in the absence of bids. Previously, the timeframe of the auction was repeatedly rolled back and failure to adhere to the official privatization plan was cited as the official reason behind the cancellation.
The state’s stake in Siberia Airlines was scheduled for sale long ago. Aeroflot, KrasAir and State Transport Company Russia were named among the list of possible contenders. The announced starting price was $110 mln which is considerably higher than its current market price of $80 mln and our fair valuation of $90-95 mln. A strategic investor could agree to pay a 37% premium for a blocking interest. However, the situation is complicated by the fact that this equity stake could be viewed as blocking in name only. According to the company’s charter capital, the decision on an additional share issue is adopted by a simple majority of the votes cast. The company’s management owns nearly 70% in the charter capital and reiterated statements about its intention to dilute the stake of a future shareholder.
Management’s attempts to oppose the sale of the state’s stake in the company have not been limited to threats of an additional share issue. In February 2006, the decision was adopted to place nearly a $90 mln bond issue. As a result, the air carrier’s debt will spike to $240 mln which is huge compared to the company’s current market cap ($320 mln). Taking into account that EBIT margin remains steadily in the red, we question Sibir’s ability to service such huge leverage.
However, although the decision to call off an auction involves possible negative repercussions, we remain neutral on Siberia Airlines with an estimated target price of $3,400 per share.
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