Singapore Airlines is not in dire need of cash on hand

So why sell off the 49% stake?

Acording to CIMB, SIA is apparently in discussions with ‘interested parties’ on the possible divestment of its 49% shareholding in Virgin Atlantic, with press sources suggesting that Delta Air Lines could be among the suitors.

Here's more from CIMB:

What’s next for SIA? While SIA seems to be swiftly redirecting itself towards intra-Asian and Australia-Europe traffic, the timing of the sale is interesting as airline values are likely to be depressed in the current weak earnings environment.

SIA has one of the strongest balance sheets in the airline industry, and we believe that it does not have any immediate need for cash on hand.

We explore a few potential reasons below:

A shift in alliance: One of the reasons why Delta had been mooted as a potential buyer for Virgin Atlantic was the former’s need to bolster its presence on the transatlantic routes.

Delta and its SkyTeam partner Air France-KLM are likely to have seen some decline in market share on the transatlantic, and hence they may see the rapid urge for this purchase.

However, we also thought that SIA could potentially look towards partnering up with SkyTeam (and in so doing, exiting Star Alliance). We believe that SIA is concerned with Air China’s growing ties with Cathay Pacific, and we think that it too would like to gain closer links to a Chinese carrier.

One of the reasons SIA has given for why they have not done so is because the other Chinese airlines are in different alliances.

Given that both China Eastern, which it tried to purchase a stake of in 2007, and China Southern are in the SkyTeam network, SIA may choose to use its sale of Virgin to a key SkyTeam member in an attempt to reconfigure its partnerships.

A move to SkyTeam would free Cathay to move across to Star Alliance from oneworld, where there is likely to be growing discomfort from the expansion of Qantas’ Jetstar subsidiary in Hong Kong.

Further corporate activity: Recall that SIA had acquired 49% of Virgin Atlantic for S$1648.5m back in 2000. Goodwill arising from the acquisition was S$1589.2m, with this amount entirely written off against shareholder reserves in the year of purchase.

Thus any amount received by SIA from a buyer is likely to be booked as a gain on sale.

Keeping in mind SIA’s strong net cash position of around S$4m, any further gains from a potential sale would already bolster SIA’s already enviable balance sheet.

Since the ascension of Goh Choon Phong to CEO of the company, we have already seen SIA become more aggressive with tie-ups and partnerships, and this sale could be a precursor to further corporate action.

This would help to explain the timing of any sale. That being said, we do not see any particular opportunities that fit SIA’s refocused strategy at this time.