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Bailing out

8 Aug 2014 By Peter Thal Larsen

Malaysia has thrown shareholders in its troubled airline a parachute. The country’s state investment fund is offering 1.4 billion ringgit ($436 million) to take Malaysian Airline System private. The deal gives investors a price the company’s shares haven’t closed at since February, before the already-ailing carrier was struck by double disasters. Taxpayers and employees may be less fortunate.

Malaysia Airlines was in financial trouble even before Flight MH370 was lost over the Indian Ocean in March. The national carrier has racked up losses of more than 4 billion ringgit since 2010, while gross debt has trebled over the same period. The tragic shooting down of Flight MH17 over Ukraine in July only served to accelerate plans for what majority shareholder Khazanah describes as a “complete overhaul” of the business.

The sovereign wealth fund has promised to spell out its plans by the end of the month. However, it wants to remove Malaysia Airlines from the public markets before embarking on the restructuring. Hence its cash bid for the 30 percent of the business it does not already own. The deal needs approval from a majority of independent shareholders, but it’s hard to see them holding out. The offer is a 23 percent premium to the volume-weighted average over the past six months, and 29 percent above the company’s most recent book value.

The refit is likely to involve shrinking Malaysia Airlines’ debt and cutting overhead so that it can better compete with low-cost rivals. That will involve politically tricky negotiations with unions, and may require an injection of fresh capital by the state. Whether that’s a good use of taxpayers’ money depends on how much Malaysia values having its own airline. Either way, minority shareholders have been given an opportunity to float clear of the mess. They should seize it, and breathe a sigh of relief.


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