Saturday, September 12, 2009

MBO in Jet Airways

I am closely tracking the strike by the Pilots of Jet Airways. Any frequent flier in Jet Airways will agree with me that its service quality has gone down after its tie-up with Kingfisher Airlines. Now you look at any two cities and find the best time to travel between the cities and you will find that Kingfisher offers the most convenient timings and Jet does not.
It was a different story before the tie up between the two airlines. I do not know what actually happened behind the scenes. But Kingfisher managed to get a better deal while having a tie-up with Jet.
I personally think Jet will benefit a lot if it breaks its tie-up with Kingfisher. And this is where I see the strike by the pilots as an opportunity. The pilots can do an LBO on Jet and take it private and release value by just breaking the tie-up with Kingfisher. The pilots union will not come in the way of shareholders' value creation as the ownership (at least majority ownership) will be with the pilots.
Any takers?

Wednesday, September 09, 2009

Back to School

The assignments for a Fulbright Scholar are not exactly defined. You can do whatever you want. Do research. Study books. Update yourself. Attend classes. Explore United States.

I am doing little bit of every thing. And today I attended the first class here at Stern. I last attended a class in 1994 at IIM Bangalore. Now I am back to school after almost 15 years.
I attended the Valuation class of Prof. Damodaran. He is simply great. A very simple person (I think all great teachers are simple :)), has a great sense of humor, loves the subject, is an expert in valuation. There are some 200-odd students who are attending his class.
It is sometimes good to view class room teaching from a student's perspective.

Nobody taught me valuation at IIMB. In fact, IIMB introduced Valuation as a course in 1995. I learnt it by studying different books. I wish I studied the subject here at Stern.


Problems with Cash-cum-Stock Offer

There are innumerable evidence about the negative returns to the bidder post-announcement of an acquisition. This makes any cash-cum-stock offer an interesting exercise.

Look at the Kraft Foods' bid for Cadbury. Krafts' price fell by 5.9% yesterday (day 1 in event study parlance) after the announcement of the takeover bid. The bid is a 60% stock and 40% cash bid. Just assume that there is no synergy in the merger. Then the price of Kraft will fall to reflect any takeover premium. But this simultaneously reduces the blended offer value for Cadbury.

The current stock prices of Kraft and Cadbury present an interesting case study in risky merger arbitrage that the arbs used to do during the 1980s and early 1990s. Cadbury's price is above the blended offer price (computed after the price of Kraft declined) and the I Bankers of Kraft are confident that no White Knight is going to come to the rescue of Cadbury.

If this is correct, a risky arbitrage strategy would be to go long on Kraft and short on Cadbury. But as I said, it is risky arbitrage. :)

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