Deccan Aviation and Kingfisher Airlines to combine?

The Deccan Aviation Board will meet today to discuss consultant Accenture’s recommendations on a restructuring proposal. The move will seek to formalize the integration of Kingfisher Airlines and Deccan Aviation. In both companies, the Vijay Mallya promoted UB Holdings owns a majority stake.

The main reason for the restructuring is Kingfisher Airlines’ desire to fly on international routes, which it cannot do till 2010 under the existing rules, which require a carrier to have flown domestic routes for five years, before it can go abroad. Since Deccan will fulfill that criteria by 2008, the idea will be to project them as one entity.

That a restructuring is being considered indicates the government’s unwillingness to accept the two as one entity, despite them having a common owner, sharing infrastructure and common branding. Kingfisher Airlines wants to be quickly off the block for its international operations, as these routes are more profitable. This is evident from the results of its main competitor, Jet Airways. Kingfisher will start getting deliveries of new aircraft which it will want to deploy on international routes. What remains to be seen is how the restructuring will be done.

Deccan is a listed entity whereas Kingfisher Airlines is an unlisted entity but owned by UB Holdings, which is listed. The easiest option is to merge Kingfisher Airlines with Deccan. The valuation will be a difficult task. Deccan is bigger in terms of income with last available figures showing revenues of Rs 2,142 crore while Kingfisher had revenues of Rs 1,553 crore. Their losses were Rs 419.5 crore and Rs 577.3 crore respectively. But the ratio may be skewed in favour of Kingfisher, where UB holds a stake of 78.9%, as it has a premium image compared to that of Deccan.

That will also ensure that the merger with Deccan, in which UB holds a 46% stake, does not unduly dilute the promoter holding in Kingfisher. There have been reports of a reverse merger and its tax implications. This may result in a straightforward merger not being done. The other possibilities include creating a complex structure, hiving off all the non-aviation UB Holding businesses into a separate holding company, and then merging Deccan and Kingfisher into UB Holdings. Then rename UB Holdings as Kingfisher Deccan Aviation.

This is just one option, am not sure if it is a good option either. India has some really sharp brains in the field of accounting, let’s see what they come up with. The structure will determine who gains more, UB Holding’s shareholders or Deccan’s shareholders.

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