Cebu Pacific takes control of 1Aviation with P113M debt-to-equity conversion

Cebu Pacific [CEB 32.25, down 2.0%; 70% avgVol] [link] disclosed that it increased its ownership stake in 1Aviation Groundhandling Services Corp. (1AV) from 40% to 60% through the conversion of debt to equity. The transaction gave CEB 1.13 million 1AV shares valued at P113 million, and more importantly, gave CEB a controlling interest in the ground handling business that operates in 34 airports and has 6,224 employees. CEB said that the transaction would “improve [1AV’s] financial health”, and “strengthen [CEB’s] management influence to enable it to more effectively integrate 1AV’s services with its operations.” The Gokongwei Family’s airline added that the move would “reduce its operational costs while improving its service quality.”

MB bottom-line: There are a lot of possible reasons for this move, but based on what’s public, it makes a lot of sense (to me) for CEB to seek control of the ground handling services for its planes given how complicated (and expensive) it must get to coordinate ground services amid all the delays and flight cancellations caused by typhoons and other storms that are only going to get stronger and more frequent as the years go by. It still doesn’t make a lot of sense to me as an investor to own airlines, but so it goes. 1AV isn’t a huge company (the debt-to-equity conversion implies an enterprise value of around ?565 million), but it likely has an outsized impact on the quality of life of CEB and (more importantly) CEB’s passengers.

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