MAS restructuring

Finally ... hoping for a good outcome.

THE long-awaited restructuring of Malaysia Airlines (MAS) has finally taken off.

Yesterday, Khazanah Nasional Bhd embarked on its first step to turn around the ailing airline that has undergone two aviation disasters since March 8 this year – something no other airline has ever gone through.
Even before the tragedies, the airline had been in dire straits, losing money repeatedly as it operates in a tough environment where low-cost carriers eat into its market share, while rising jet fuel prices compound its cost.
The proposal is for the airline that lost two planes – one mysteriously disappearing with the other being shot down in Ukraine – to be taken off the radar through a corporate exercise.

However, the question that is being bandied about is whether a restructuring this time around would be any different, considering that so many of the previous restructuring exercises had failed. Also, questions arise as to whether Khazanah, which is MAS' major shareholder, should be the agency to take the initiative.
MAS has undertaken about half-a-dozen restructuring exercises in the past 12 years and changed chief executives five times.

"I am sceptical about the success of the undertaking. When every government globally is moving away from running airlines, this is a regressive move to own the entire stake in a national airline. It is not a good way forward,'' says Shukor Yusof, an independent aviation expert from Singapore.
He adds, "I feel sad for the employees, as the future of MAS is going to be out of their hands.''

Khazanah announced yesterday that it was taking MAS private via a selective capital reduction and repayment exercise. It will pay 27 sen a share, totalling RM1.4bil, for the remaining shares totalling a 30.63% stake in MAS. Khazanah has a 69.37% stake in MAS, while Minister of Finance Inc holds the golden share.

It would appear that there is political will to resolve the problem plaguing MAS, with Prime Minister Datuk Seri Najib Tun Razak wanting the takeover to be a success.

In the last 10 financial years, the airline has lost money five times, with the biggest loss of RM2.5bil being reported in the financial year ended Dec 31, 2011.

Over the past five years, Khazanah has also pumped in RM5.7bil via three rights issues, and since 1998, about RM19bil worth of rights issues and government-backed debt have been pumped to keep the airline afloat.
It's easy to fathom why Khazanah has stepped in.

MAS is burning cash at an astonishing rate of RM5mil a day and the RM3bil-odd in its coffers will wither sooner than many may think. The airline also has debts of over RM11.5bil.

MAS' biggest problem is that it is making less than what it spends. Management had opted for an aggressive strategy to fill planes at the expense of yields, which has backfired.

MAS' revenue per available seat kilometre (RASK) is declining more than the cost as measured by cost per available seat kilometre (CASK) (See bar chart).

MAS' RASK for full-year 2013 was down by 6% to 23.5 sen from 25 sen in 2012, while CASK was also down 4% from 25.8 sen to 24.7 sen.

Khazanah believes that taking troubled MAS private would pave the way for a complete overhaul of its loss-making operations, and more details of its planned restructuring are expected by the end of August after it secures approval from shareholders.

Although details are not available, speculation is that at least 30% of its 19,755 workforce could lose their jobs and that there would be an overhaul of the top management, a streamlining of routes, a resizing of its fleet and, most importantly, renegotiations of contracts.

Will Khazanah have the might to renegotiate contracts?

"MAS can be fixed. It is a question of whether they want to break the rice bowl of interested parties who are suppliers to MAS,'' says an analyst.
MAS' former managing director Tan Sri Abdul Aziz Abdul Rahman says: "MAS needs a large capital injection that Khazanah and/or private parties must provide and with all that, MAS will survive. The planning for open skies must start now or else MAS will not be able to compete. It will be swallowed by other airlines. Khazanah should also not sell the other operational units as suggested by many.''

Massive haircut

MAS' shares were suspended from trading yesterday morning and closed at 24 sen a share on Thursday. Khazanah believes its offer of 27 sen a share offers a 12.5% premium.

If someone had bought the shares three months ago at 21 sen, then the premium would be 29%.

MAS' shares are at its all-time low, as even during its last downturn in 1998, the shares were trading at higher levels. At current prices, it does not cost Khazanah much to make the offer.

However, for those who had bought the shares at 80 sen, RM2.50 or even RM3, the financial loss would be painful, not forgetting their holding cost.

For the privatisation to go through, an EGM needs to be called to seek shareholders' approval. The date has not been fixed yet, but the question is:

Will Khazanah get the required votes to push the plan through?
Khazanah, with a 69.37% equity, cannot vote as it is deemed the interested party. The voting will have to be done by those holding the 30.63% of shares, of which 20.4% is free float.

Other than Khazanah, the other institutions holding a stake in MAS include the Employees Provident Fund with 0.18%, Skim Amanah Saham Bumiputera (1.66%), Norges Bank Investment Management (0.29%), Great Eastern Life Assurance (0.60%), State Financial Secretary (0.27%), Mega First Housing Development (0.19%) and OSK Capital Partners (0.13%).

The exercise requires approval from at least 50% in the number of minority shareholders and 75% in the value of minority shareholding. Even relevant creditors and lenders have a right to object.

"Khazanah should announce the details of its plan before the EGM for everyone to digest before they make up their minds to either vote for or against the privatisation. They should not keep the shareholders in the dark.

"In my view, the institutional funds should not sell their shares because they have held the stock for so long and now that the Government is seriously going to restructure the airline. It is their chance to make something out of their investment. More so if the funds have been holding on to the stock for a long time,'' says an analyst who requested anonymity.

He cites the example of MISC Bhd, which was supposed to have been taken private by Petronas but was failed at the eleventh hour when a group of minority shareholders did not accept the offer and scuttled the privatisation.

"The long-term funds should seriously not give up their MAS shares, unless of course, they are pressured to react and help push the plan through. Their entry cost must have been higher and it cannot be anything close to 27 sen. It would be unfair to the minorities and the institutions,'' he says.

In contrast, both Maybank Investment Bank and AllianceDBS Research are saying it is a good move and to "go for it".

MAS is expected to release its second-quarter results soon, and according to Maybank Investment Bank senior analyst Mohshin Aziz, "the results will be awful, perhaps the worst in its history. When that happens, it will definitely spook everyone and evaporate any hope for a revised offer".

MAS reported an RM279mil net loss for the first three months of 2014, its biggest net loss in over two years and its fifth consecutive quarter of losses.

Khazanah may have planned for a delisting to enable it to restructure MAS. Once that is completed, many expect the airline to make a comeback to the stock market in a few years' time, as seen with previous privatisation exercises involving Astro Malaysia Holdings Bhd, Maxis Bhd, Bumi Armada Bhd and even 7-Eleven Malaysia Holdings Bhd.

"It will make a comeback and by then, it would be in a better financial state. Khazanah will want to get its money back at some point and they would not want MAS to be delisted for long,'' adds an analyst.

Section 176 of the Companies Act or not?
The lack of details has got the market buzzing that Khazanah will invoke Section 176 of the Companies Act so that it can focus on restructuring, although some others reckon it could be done without invoking that law.
Lawyer Datuk N. Sivananthan says it is not necessary for Khazanah to invoke Section 176. From the legal perspective, if an entity is taken private, the liabilities are binding on the new owners.

"If there is anyone who can renegotiate contracts, it is Khazanah, and I do not think anyone would not want to renegotiate with Khazanah. The fact that it is Khazanah and not a third party means that MAS will survive ... it will progress.

"Khazanah can make the management changes and will not be susceptible to shareholders' scrutiny. It can also pump money into MAS. Even if MAS makes losses, it will not be shown individually in Khazanah's books, as it will only be reflected on Khazanah's overall balance sheet,'' he says.

Private ownership allows room for Khazanah to introduce an appropriate capital structure for the airline to meet MAS' substantial funding requirements in the next few years, and to sustain operations amid a high level of debt.

Despite that, reports are suggesting that Khazanah is talking to banks for a strategic overhaul that could include the partial sale of its engineering unit and an upgrade of its ageing fleet.

"One of the reasons they are taking the company private is to avoid unnecessary scrutiny. It gives them a free hand to determine the future of MAS, but I am not sure if this plan was well thought-out, taking it private versus bankruptcy. There should have been a better way, a different approach and they should get the people with solid industry knowledge to run the airline,'' says Shukor.

He adds that Malaysians also have a right to know where the national airline is heading and who is going to run it and which direction it would be taking.

The plight of the unions and the staff
Since the announcement yesterday, some MAS employees are in a stake of shock, while others are scrambling to find out more.

"Most of them are worried about their jobs. They have been hearing all sorts of rumours, such as a 30% job cut, and that is making them anxious. If indeed there are job cuts, it should start from the top. MAS is top-heavy. The selection process should also be fault-proof,'' says an industry expert.

The spokesperson of MAS' biggest union, Malaysia Airlines System Employees Union or Maseu, has a clear message, "We will support the privatisation of MAS by Khazanah, but there must be a new management team. If the current team continues, then don't count on our support. As it is, staff morale is down and with a new team, we need to get communication going again, and there should be a very comprehensive business plan, for the short to long term. The new team should be people with aviation experience.''

Shukor adds, "The same people have been given ample opportunity to turn the airline around, but have failed. It does not provide any comfort to me that the same people are taking it private.''

Abdul Aziz says that "since Khazanah will own MAS, the first thing they should do is restructure the management for the purpose of restructuring the business and operation plans".

Source: The Star