As Korea Development Bank (KDB) chairman Lee Dong-geol announced on April 16 that creditors would quickly come up with a financial support plan for Asiana Airlines Inc., market watchers are speculating about the price of the country’s second largest carrier.
Financial authorities and KDB believe that Asiana Airlines would attract many bidders as risks stemming from inept top management have been removed by the resignation of former chairman Park Sam-koo and a number of conglomerates with abundant capital are expected to participate in the deal. However, some say that Asiana Airlines will not be able to be sold at the full price because it has been less than four years since Kumho Engineering and Construction Co., the parent company of Asiana Airlines, put its flagship affiliate for sale in the M&A market but failed to sell it in 2015.
Lee visited the press room at the KDB head office building in Yeouido, Seoul, and said the sale process would take about six months considering the legal procedures involved. He did not mention the exact price but said, “Currently, Asiana Airlines’ debt amounts to 3.60 trillion won (US$3.17 billion) and the acquisition cost would be a third to a fourth of the debt.” In short, creditors think that the fair price of Asiana Airlines is more than 1 trillion won (US$879.89 million).
However, M&A experts point out that the situation will change if the current “irrational craze” for Asiana Airlines shares among stock investors subsides.
To begin with, the most commonly used method used in the M&A industry to estimate the value of a company for acquisition is the EBITDA multiple. EBITDA, or earnings before interest, taxes, depreciation and amortization, is an indicator of a company’s ability to generate cash. In general, a normal company is valued at 8 to 10 times its EBITDA for acquisition. The appropriate price is calculated by subtracting the net amount of debts, excluding cashable assets, from a company’s external debts. Asiana Airlines’ EBITDA stood at 440 billion won (US$387.15 million) as of the end of last year. Even with the largest multiple, Asiana Airlines is priced at only 700 billion won (US$615.93 million) by subtracting 3.70 trillion won (US$3.26 billion) of the net amount of debts from 4.4 trillion won (US$3.87 billion) of the company’s value. However, the figure even goes down to 234.20 billion won (US$206.07 million) as the buyer can secure management rights of Asiana Airlines by purchasing the 33.47 percent stake held by Kumho Engineering and Construction Co. The cost does not exceed 304.40 billion won (US$267.84 million) even when the buyer pays the control premium, which is usually 20 to 30 percent of the equity value, for the stake of Kumho Engineering and Construction.
Even with the average EBITDA of Asiana Airlines, the corporate value and the equity value for the sale are 1.30 trillion won (US$1.14 billion) and 435 billion won (US$382.75 million), respectively. The equity value goes up to 565.50 billion won (US$497.58 million) when the control premium is added. This is similar with 568.90 billion won (US$500.57 million) of the value of old shares based on 1.73 trillion won (US$1.53 billion) of the market capitalization of Asiana Airlines on April 16. Since the stock price abnormally had been surged from last week with the M&A issue, a buyer is least likely to accept the value. So, in sum, the price of Asiana Airlines will be 400 billion won to 600 billion won (US$351.96 million to 527.94 million), including the control premium, when the rule of the cold-hearted M&A industry is applied.
To be sure, the financial authorities and the creditors believe that the takeover price can be raised through a capital increase where new shares are assigned to third parties. However, a buyer is less likely to overextend the amount of capital increase as it can take over the control of Asiana Airlines by purchasing only old shares. It means that the market and the creditors can show different views on the deal.
Asiana Airlines had already been evaluated in the M&A market in 2015. There is a market price formed four years ago. The creditors, including KDB, proceeded with the open bidding for their 57.6 percent stake in Kumho Engineering and Construction, which had Asiana Airlines as an affiliate. Back then, the predominant view in the market was that the sale price of Kumho Engineering and Construction would reach over 1 trillion won (US$879.89 million) as the buyer could also secure management control of Asiana Airlines.
However, Hoban Construction Co. was the only strategic investor which participated in the bidding at the closing date for a letter of intent. The company offered only 600.70 billion won (US$528.55 million) in the official bid, which was far short of the estimated market price. KDB decided to reject the proposed bid in bewilderment and Park exercised his right of first refusal and bought Kumho Engineering and Construction, which owned Asiana Airlines as an affiliate, for 722.80 billion won (US$635.99 million) after all.
The only differences from four years ago are that Park no longer has the right of first refusal and Air Seoul Co. is now added as one of the key affiliates of Asiana Airlines. The company had other affiliates at the time. Some even say that the company had a better financial structure back then when it held Kumho Terminal Co. which owned the site of Shinsegae Department Store in Gwangju.
An official from the financial industry, who is well acquainted with M&As, said, “The M&A market is a cold-blooded industry which follows the logic of money, not politics. When there are a lot of potential buyers, there will be a price competition, which will make the reasonable price meaningless. If it is not the case, not many buyers are willing to pay more than 1 trillion won (US$879.89 million) for Asiana Airlines. The disposal procedure will make little progress when there is no buyer who offers the price level the creditors want. Conflicts over the sale between Park and the creditors can be deepened.”