Air Asia Restructuring – Making Money Out of Nothing At All

This dreaded assignment eventually fell into my hands, being the only analyst with Malaysian roots.

To be upfront, I have not followed much on the Malaysian markets, and when the news about Capital A Berhad (KLSE: CAPITALA) restructuring plan broke, I deemed it too complicated to even waste brain energy contemplating the mental gymnastics involved.

However, this mammoth task and storytelling has been entrusted to me. Thus, I will do my very best to keep the general market abreast of what the deal is, how it is going to be executed, and whether it is fair or not.

The title, aptly put, takes credit from the hit song “Making Love Out Of Nothing At All” by Air Supply.

I hope this article can paint a clearer narrative of what is going on, as the articles out there are as equally complicated as the deal itself.

As what is happening today is a culmination of the past, let me bring you through the entire Capital A and AAX saga!

COVID-19 Pandemic – A story of 2 PN17 sister companies

For most industries and listed companies, the pandemic-stricken years are now just a fragment of history. Even Singapore Airlines Ltd (SGX: C6L) has recovered from its lowest.

But back when the night was at its darkest, when no one flew, airline companies around the world came to a grinding halt.

It was during this period that Capital A and AirAsia X Bhd (KLSE: AAX) became PN17 companies.

For my Singaporean readers, a PN17 is somewhat like a DORSCON orange warning – it indicates that a company has triggered certain financial red flags.

Capital A became a PN17 company in January 2022.

As for AAX, it was also a PN17 company but has since exited that status on Nov’23 after finally reporting a net profit.

Capital A, on the other hand, languished and even had to seek a time extension for a regularisation plan.

Saving Capital A with AAX

At the end of April 2024, news broke out of a restructuring deal to alleviate Capital A.

Capital A, the flagship holding company that is still predominantly an airline company, has undergone several rebranding to position itself as a one-stop solution provider and tech company.

Now looking back, these changes foreshadow the current master plan.

The main issue that is still dragging Capital A down as a PN17 company, is the shareholders’ funds (the difference between assets and liabilities) fell below 25% of its total paid-up capital. This is a key criterion for its PN17 status, indicating potential financial distress.

To raise capital, Capital A needed either a white knight, or it needed to sell its business to a willing buyer.

The master plan – sell its current Aviation business, which includes AirAsia Malaysia, AirAsia Thailand, AirAsia Indonesia, and AirAsia Philippines to AAX.

AAX will then be acquired by a newly established entity named AirAsia Group Sdn Bhd (AAG).

So, AAX shareholders, rejoice! You will be owning the entire airline business by becoming shareholders of AirAsia Group (AAG).

What’s in it for Capital A shareholders?

With the sale and disposal of its aviation business, the dream of transforming Capital A into a tourism and aviation ecosystem company materialises.

As of the latest FY 2023, the aviation arm brought in a revenue of MYR 13.5 billion, which is 91% of Capital A’s total FY 2023 revenue.

And it’s going to be sold off to AAX for a whopping MYR 6.8 billion.

The valuation does seem a bit off, and I am here to provide both sides of the coin.

The first side is how overvalued it is to sell off 91% of Capital A (the aviation business) at MYR 6.8 billion when Capital A is only worth MYR 3.70 billion at RM 0.87 per share. From a purely mathematical standpoint, someone with MYR 4 billion could easily buy over the entire Capital A, let alone just letting AAX buy the aviation business for MYR 6.8 billion.

The other side of the coin is how cheap Capital A is letting go of its aviation business. It still raked in MYR 13.5 billion in just 1 year. AAX is paying MYR 6.8 billion for a business that can bring in MYR 13.5 billion at least, assuming 0 growth.

All I can say is that, due to the urgency to escape its PN17 status, Capital A’s value has become significantly depressed, leading to this unique scenario. The availability of AAX as a separate entity and a pure white knight ensures that it becomes a win-win on paper for all parties.

AAX becomes AAG, owning the entire airline business of AirAsia, while Capital A becomes the SuperApp company that finally takes form in the final shape.

With that status and new cloak, its seeking for dizzying valuation should it next plan to list its shares on the US stock exchange. And it will still own 18.39% of the pure-play AirAsia Group.

Existing Capital A shareholders will be getting a distribution in specie via a reduction and repayment of Capital A’s share capital.

With this arrangement, Capital A shareholders will also become shareholders of AAG.

Show me the money for the MYR 6.8 billion deal

So now we know the grand plan. So where’s the money that will make this happen?

The new company intermediate form (now AAX, soon to be AAB) will issue new shares worth RM3 billion — 2.31 billion shares at RM1.30 each — to acquire AirAsia Aviation Group Ltd (AAAGL).

The current AAB, will acquire it for MYR 3.8 billion, to be satisfied by assuming MYR3.8 billion Capital A owes AAB. Just think of it as a repeat of what Tony Fernandes did when he bought AirAsia for RM1 – paying RM1 and assuming the entire debt of the company back then. Just that this round, AAB-to-be- (present day-AAX) gets AAB for free as it becomes the debtor to Capital A.

TL;DR – It’s all about saving Capital A, and morphing it into a SuperApp company, eventually getting a high valuation on the stock

Due to the severely depressed valuation of current-day Capital A, it really would have taken plenty of investment bankers from top-tiered alma-maters to craft out this plan.

Mind you, I chose to stop here, in anticipation that there could be an episode II or, god forbid III with more details coming out as this slowly unfolds.

Both majority shareholders of AAX and Capital A, Tan Sri Tony Fernandes and Datuk Kamarudin Meranun face the biggest challenges of their lives. They will certainly be in favour of making AAX a full-fledged pure-play airline business by first working on private placements.

Then, with a new look Capital A as a SuperApp company, it will be easier to seek for higher valuation when it comes to fundraising.

But the question that I would plant into every investor’s head is this – do you think that a business that has been always well run, and prudent in managing finances, needs to always appear in headlines for fundraising purposes?

If we just look into this particular plan in isolation, it does seem like a win-win for everyone. But historically, there have been too many rounds of fundraising exercises from a listed company and even for a startup.

Whether existing Capital A shareholders will still maintain their ownership in the upcoming SuperApp company is still a mystery as well. I will be mad/surprised if that isn’t the case!

Cash would have been a better distribution-in-specie for current Capital A shareholders for selling off the aviation business. Then again, this is about saving Capital A, not the retail shareholders.

Perhaps Air Supply said it all: “And I don’t know how you do it, making money out of nothing at all…”