Overview of aviation Industry in India

Type Of Merger

• Horizontal Merger - Competitive company. • Reverse Merger - Air Deccan merged in Kingfisher.

Clash of The Titans

MARS v/s

VENUS

Final Merger Deal

MERGER

Rationale Behind M&A

• From the Kingfisher’s Point of view - To start overseas business(May 2005) - For the expansion purpose - Survive from the losses (577 Crore loss)• From the Air Deccan’s Point - To make the profit & overcome losses (418

Crore loss)

DEAL STRUCTURE

• 1st Phase:

- UB bought 26% stake at Rs.155 p.s. on 9th July,2007

- Paid Rs.550crores

• 2nd Phase:

- Open offer for additional 20% stake

- Additional Rs.418crores

Factors which influence mergers

•Globalizing competition

• Financial circumstances prevailing in the market

•Decreasing the strength of the industry

• Bringing about integration in the industry

• Effecting changes in the technology used

• De-regulation

Low Cost carriersLow Cost carriers

Competitive scenario

Total Passengers Carried

Current Competitive Position

Comparative Valuation

•Air Deccan airlines merged with Kingfisher Airlines and decided to operate as a single entity from April, 2008. It would be known by a different name-Kingfisher Aviation.

•The merger is based on recommendations of Accenture, the global consulting firm.

• KPMG was asked to do the valuation and the swap ratio was decided accordingly.

• The merger came through on as Vijay Mallya from Kingfisher airlines bought 26% of the stake in Air Deccan.

•The unification of the two carriers had to be sanctioned not only by the two panels, but also by the institutional investors, independent directors, and other shareholders.

•Air Deccan had four independent directors-which included prominent persons like IIM Prof Thiru Naraya, Tennis player Vijay Amritraj, and A K Ganguly, Former MD Nabisco Malaysia.

•After the merger, the company has a combined fleet of 71 aircrafts, connects 70 destinations and operates 550 flights in a day. The combined entity has a market share of 33%.

• Gopinath continued as the Executive Chairman and Malay would take charge as Vice Chairman.

•The charter service of the respective airlines would be hived off and operate as a separate entity.

•Post merger, KingFisher would operate as a single largest (private) airline in the sub-continent.

•They would be stronger vis-a vis lessors, aircraft manufacturers (Airbus in this case), and will also spend less on training and employees.

•Costs would also reduce which is associated with maintenance of aircraft. The savings in cost would be lower by about 4-5% (Rs 300 crores) which is a large sum.

•It would result in a saving of 3 billion in the first year itself through the sharing of aircraft and workers.

•Further, by devising a more optimal routing strategy it could help in rationalizing the fares.

•Before the merger Air Deccan recorded a net loss of Rs 213.17 crores on revenue of Rs 437.82 crores for 2006-07. The company had also raised Rs 400 crores through an IPO in May 2006.

•The merger will create a more competitive business in scale and scope to emerge as market leader.

•Air Deccan began its operations with one aircraft and with one flight but after the•alignment with Kingfisher Airlines, has a total fleet of seventy one aircrafts-41 Airbus•and 30 ATR.

• It operates 537 flights and covers 70 destinations. It offers point to point•service.

•After the merger, it is expected that Kingfisher will focus more on the international routes while Air Deccan will give it a wider domestic reach.

•Also Air Deccan plans to continue as a low cost carrier while Kingfisher will function as a full-service carrier.

•There will be immense synergies as both operate Airbus. The average age of the Air Deccan fleet is 6.1 years as of Apr 2006.* Air Deccan operates a fleet of 43 aircraft comprising 20 brand•new Airbus A320 aircraft and 23 ATR aircraft.

•

SYNERGIES FROM MERGER Operation synergy

•Kingfisher and Air Deccan have exactly the same fleet of aircrafts & the same equipment's (engines, brakes , etc.)•This provides a huge opportunity on saving in engineering and maintenance cost. (cost cutting upto 300 cr)

Infrastructure synergy•Kingfisher and Air Deccan are now using 65 airports, of which more than 28 are common to both.•The new entity will have over 71 aircrafts (41 Airbus aircrafts and 30 ATR aircrafts). This will have air travel for all fares and all kinds of people. •Offer the maximum number of 537 daily flights in 69 cities. •Synergy benefits arising from a common fleet of aircraft.

Investment synergy

Fleet expansion can be optimized to increase Available Seat per kilometer (ASKs) as they will have more option to choose aircraft for short and long haul operation accordingly.

Sharing of physical resources both on ground and in air could potentially spread fixed cost over a larger base and hence lower unit cost

Route synergy

•Increase their passenger load factor

•Both the companies can rework on route and network strategies formation so that both the airlines benefit together as they have same flights between two destination.

Limited Air Infrastructure

Cost Structure of an Airline

Innovative Promotion at Air Deccan

Innovation in Pricing

Air Deccan’s Ticketing System

Financing Air Deccan

MRO Facilities

Motivation for

Merger• Ever Increasing Cost

• Compromise on quality hits the brand

• Unviable pricing

• Competition

• Increasing costs

• Difficulty in maintaining brand image

• Competition from low-cost airlines

• Competition from International Airlines

Possible gains

• Routes network

• License to fly internationally

• Cash crunch

• Leveraging management and HR

Possible gains

• Economies of size

• Rationalization of Personnel

• Increase in Customer base

Possible losses

• Fundamentally opposite models

• Impact on masses -

-Fear of rise in fare prices

-Ignorance of target audience

• Loss of individuality

Offer price Rs. 155/- per fully paid up equity share

Rs. 155/- per fully paid upequity share

Share holding of Acquirer and PACsbefore the Public Announcement (P.A.)

NilNil

Shares acquired by way ofPreferential Allotment purchases (No & %)

35,222,231 (25.97%) 35,222,231 (25.97%)

Shares acquired in the open offer (No & %)

27,126,360 (20.00%) 27,126,360 (20.00%)

Size of the open offer(No of shares multiplied by offer price per share)

Rs. 4,204,585,800 Rs. 4,204,585,800

Shares acquired after P.A. but before 7 working days

Nil Nil

Post offer share holding of acquirer

62,348,591 62,348,591 (45.97%)

Pre & Post offer share holding of Public

78,247,067And 51,120,707 78,247,067 and51,120,707

COST BENEFIT ANALYSIS

Cash Paid = Rs.550Crs + 418Crs = Rs.968Crs

Present Value of 46%stake = 62316254.28*137.5 = 856.85Crs

Cost for kingfisher = Cash Paid-Present Value

= 968-856.85

=Rs.111.15Crs.

Kingfisher Air Deccan

Rs 550 CR

7 3

26% stack

Kingfisher Air Deccan merger Kingfisher Air Deccan merger

:

Note:- Based on Market price, net asset value and discounted cash flow (By KPMG & Dalal shaw) Enterprise value of Air Deccan:- Rs 2115 crNote:- Based on Market price, net asset value and discounted cash flow (By KPMG & Dalal shaw) Enterprise value of Air Deccan:- Rs 2115 cr

SWAP ratio

Conclusion

The Industry has Witnessed

tremendous growth in the Past

Decader Leading to intense

Competition in the Industry &

Setting the Stage for

Consolidation

The Aftermath – Post Merger Issues

• Different Cultures

• Expected Job Cuts

• Different Leadership Styles

contd...• Expected Industry impact

Further consolidation

Rise in fares

Greater shareholder value

Higher attrition rates in employees

CONCLUSION• It’s a capital intensive industry,• With few scale efficiencies,• Within a partly regulated infrastructure,• Free market entry• Price competencyThis was the right decision to merge for

achieving all of the above objectives.

Kingfisher & Air Deccan- Merger Advantage

• The fresh equity capital will allow the Deccan to pay the loans & to fund various infrastructure projects.

• Reduction of cost by sharing infrastructure• The merger ensures that Kingfisher does not need to invest

more in infrastructure or in spare planes, thereby reducing costs and increasing profitability.

• The combined share of the two carriers will increase the Market share.

• As per the existing laws Kingfisher Airlines would not be able to operate on international routes until 2010. However Air Deccan would be eligible from the second half of next year as its five-year ceiling is coming to an end.