Valuation of SAS: In M&A Perspective

Mathias Roland Dirksen

Student thesis: Master thesis


The DCF analysis of SAS suggests a fair value of 8.36 SEK pr. share. As such SAS' share price of 14.05 SEK as of 1st of May 2013 is an overvaluation. The overvaluation is supported by the multiples, but not by the M&A analysis that rather tend to suggest an undervaluation of SAS' share. SAS' market cap has declined from 13.6 SEKbn in 2007 to 4.6 SEKbn in May 2013. The main reason is SAS' strategic fit with the industry, facing intense competition, and homogenous products. This does not correspond with SAS' value proposition of high service levels, in terms of frequency, punctuality and simplicity. Currently SAS' high prices, compared to peers, are not sufficient to cover the inferior cost structure and load factor, also compared to peers. Historically SAS' high costs were justified by high prices, derived from political monopolies. The industry deregulation has led to increased competition and price sensitive customers. As such, SAS has been forced to lower ticket prices and decrease capacity, and has not yet managed to adjust costs in accordance with revenues, even though unit costs have been driven down. As of 2012, SAS is still behind peers, in terms of salary levels, productivity and load factor. Hence, the reason for SAS' inefficient cost structure is found to be SAS national ownership, as this has made for inefficient resource optimisation and poor bargaining position against employees. SAS' operational problems have translated into a fatal financial condition, with an almost eroded equity adjusting for pensions. In relation to future operations, SAS' financial situation lowers SAS' flexibility, as to meet industry changes/possibilities, why the current situation is difficult to change. An M&A strategy could change the outlooks as the main rationale behind M&A activity in the European airline industry is efficiency optimisation, especially on the cost side. Based on experience, strategic fit, and size, Lufthansa and IAG were found to be the most obvious buyers of SAS. Applying the expected implications from mergers to the DCF base case a SAS share price of respectively 31.45 and 19.53 SEK pr. share and a sure buy recommendation was derived. Precedent transaction multiples found that 19.53 SEK pr. share is a reliable price in an M&A, but depending on the base line, a fair price could lie in the interval 8.36 SEK-19.53 SEK pr. share The precedent transaction multiples did therefore not contradict, nor support the standalone value, but did support the impression that SAS revenue characteristics are good, but costs even worse. The overall assessment of the SAS share is difficult, but a slight overvaluation can be argued for, as current share price may neglect the threat of default, but including potential upsides i.e. from M&A, why private investors will tend to bid the share price up, refraining potential bidders from acting.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2013
Number of pages121