SINGAPORE - Singapore-based ground handling and logistics player Sats has revealed how it will raise the $1.8 billion needed for its purchase of European air cargo and logistics giant Worldwide Flight Services (WFS).

The funds will be generated via a combination of $700 million through euro-denominated term loans and $800 million in a renounceable rights issue of new shares, with the balance coming from internal resources.

While no details were provided on how many rights shares would be issued or the price, the company said it would get the term loan at a favourable rate of 4 per cent to 4.5 per cent.

Temasek, which owns 39.68 per cent of Sats, has committed to taking up its rights entitlements, while DBS Bank, Citi and Bank of America will underwrite the issue.

Sats has about $680 million in cash on its balance sheet to meet the internal funding needs.

Details of the funding come two months after the company announced plans to buy the much larger WFS, which is the market leader in North America and Europe for cargo handling, with 114 cargo stations and more than 800,000 sq m of warehouse space via 170 on-airport leased warehouses.

Sats said the acquisition would enable it to expand its footprint beyond just Singapore and the region to become the world’s largest air cargo and warehousing player.

The combined entity would have about 205 cargo and ground stations around the world, compared with Zurich-based Swissport, which has 92 cargo stations.

About 85 per cent of Sats’ revenue now comes from Singapore, but the enlarged entity would see 45 per cent come from Asia, 30 per cent from the Americas and the rest from the Middle East and Europe.

The enlarged Sats would also see a more diversified business mix, with half the revenue coming from cargo, almost a third from food solutions and the balance from ground handling.

Analysts note that revenue would triple from $1.2 billion now to $3.8 billion during the first year after the deal is completed, while earnings per share would surge from 1.8 cents to 3.2 cents.

However, the market has sold down Sats shares since the Sept 28 announcement on fears that the company would be taking on enormous debt (it would assume about $1.7 billion of WFS borrowings), diluting its earnings per share, and would not be in a position to pay dividends for at least three more years (Sats has traditionally paid out 70 per cent to 80 per cent of earnings as dividends to shareholders).

Analysts calculate that the deal could raise Sats’ gearing to 90 per cent, while the net debt-Ebitda (earnings before interest, tax, depreciation and amortisation) ratio could rise from 0.5 times now to 3.4 times.

The stock, which was trading upwards of $3.80 two months ago, is struggling to stay above $2.70 now.

But chief financial officer Manfred Seah suggested the fears were misplaced. “The cost of our credit is just 4 per cent to 4.5 per cent, which is low,” he said.

“The combined entity would generate sufficient cash flow from higher Ebitda.”

He pointed out that during the pre-Covid-19 years, Ebitda was between $250 million and $300 million, while WFS’ is about $350 million. The synergies from the combination are expected to add another $100 million in Ebitda, and potentially generate about $550 million to $600 million in cash.

As for WFS’ debt, which is denominated in both US dollars and euros, Mr Seah said the enlarged company would move to rationalise, deleverage and pay this down over the next few years.

Turning to the issue of dividends, he said that while the company would be cognisant of the need to maintain a balance between retaining funds for growth and rewarding shareholders, it remained committed to paying dividends “as long as it was profitable without government relief or assistance”.

He hinted that the $800 million rights issue would not be as dilutive as the market feared. Also, as the synergies of the combination kicked in, the earnings would start accelerating in about two to three years, raising the earnings per share.

Asked about fears that Sats could become stuck in an “unhappy marriage” with a much bigger partner, he said: “This is not a pie-in-the-sky deal.

“Neither is it growth for growth’s sake. We have been watching this company for some years and went into a deep dive with due diligence over the last 10 months.

“This is a strategic move to diversify our footprint and defend our turf, which is under threat all the time. The capacities and capabilities of the combined business should not be underestimated.”

He said the deal had also priced in recession scenarios.

“Look, this is a prized asset. And if you want a prized and rare asset like a good class bungalow in Singapore or a prime beachfront property, you don’t wait until the storm blows over. A prized asset is a prized asset in whatever weather. If you can get it at the right price, and it fits your strategy, you have to go for it.”

He added that since there was very little overlap and replication of the Sats and WFS businesses and geographies, the current management of both companies would continue to lead the combined and enlarged entities.

“We will retain the senior management team at WFS to continue running the company,” he said.

Sats will call on its shareholders to vote on the acquisition early in 2023, and complete the deal during the first quarter.