This article first appeared in The Edge Malaysia Weekly on July 19, 2021 - July 25, 2021

LOW-cost carrier AirAsia Group Bhd group CEO Tan Sri Tony Fernandes recently said it was mulling a listing of its digital arm via a special-purpose acquisition company (SPAC) in the US to raise at least US$300 million. But is it late to the SPAC party?

The US SPAC boom in recent years has attracted many Asian companies focused on technology, including ride-hailing giant Grab Holdings Inc, to list there, but questions remain over AirAsia’s timing as the SPAC momentum appears to be waning, according to industry specialists.

“If they (AirAsia) had done it at the end of last year or first quarter of 2021, I think they would have been able to get it off the ground and raise money. They might be a little bit late in the game now,” says an investment banker, who asked not to be named.

SPACs are listed cash shells that acquire or merge with private businesses in order to take them public. SPAC Research data shows that 368 new blank-cheque companies have raised a mind-boggling US$113.1 billion so far this year, surpassing the record US$83 billion collected by 248 SPACs over the whole of 2020.

“Up until the first quarter of this year, the SPAC market in the US had been crazy. It seems almost everyone who is anyone, including celebrities and sports people, was setting up a SPAC as it was seen as a great way to list (versus the traditional route),” the investment banker tells The Edge.

However, he points out that after nearly two years of unprecedented activity, the SPAC fervour seems to have cooled off in the second quarter of 2021 as shares of some firms that merged with SPACs tumbled and the US Securities and Exchange Commission (SEC) toughened its stance on the SPAC structure. One of the companies that has gone public through a SPAC recently was fintech start-up SoFi Technologies Inc, whose stock price has fallen 29% since it started trading on June 1, following its merger with Social Capital Hedosophia Holdings Corp V, to close at US$16 on July 13.

“The SPAC market in the US has cooled off a lot going into the third quarter. The fever has passed. I am not saying that the SPAC market is dead, but it’s not like it was a few months ago. I think companies would find it more challenging to go public via the SPAC route now,” says the investment banker.

There is good reason for the popularity of SPACs as they offer a simpler and more flexible process than traditional initial public offerings (IPOs).

“However, companies are now realising that the SPAC route is not as straightforward as they thought it would be because the surge in SPACs has created a bubble and caught the attention of the SEC, which is beginning to rein in the sector to protect retail investors,” he observes.

It was reported that Grab has postponed its IPO via a SPAC merger till the fourth quarter of this year, from July previously, as there were delays over details required by the SEC. Grab is working with the SEC for pre-clearance for accounting policies and financial disclosures.

“Grab is supposed to be listed by now. If you add this to what happened to Didi Global Inc, the scrutiny of SPAC transactions is going to get worse,” he adds. Two US senators had recently called on the SEC to probe the Chinese ride-hailing company to determine whether it deceived US investors prior to its US$4.4 billion IPO debut.

Earlier this month, Fernandes told Reuters that a few tech-focused SPACs have approached AirAsia, and that Rothschild is working on the listing of its digital arm, which comprises a travel and lifestyle services platform, logistics and financial technology (fintech) businesses, that could happen in five months.

The investment banker says it makes sense for AirAsia to list either its AirAsia Digital or AirAsia SuperApp in the US as exchanges in Asia currently do not have the infrastructure to support these IPOs.

“That’s the reason why Grab chose a SPAC listing in the US. Otherwise, they would have technically chosen to list in Singapore.

“For AirAsia to list its digital business on Bursa Malaysia, it would be a challenge because our current platform doesn’t quite allow for that. Moreover, the digital business is unprofitable and the US market offers higher valuations to tech companies,” he says, adding that SPAC successes in Malaysia such as Hibiscus Petroleum Bhd and Reach Energy Bhd are relatively few.

Etiqa Malaysia chief strategy officer Chris Eng Poh Yoon also notes that the SPAC market in the US has now “gone slightly out of favour after the earlier excitement”.

“While AirAsia can ride on the excitement of upcoming Southeast Asian IPOs such as Grab and Asian insurer FWD Group Ltd, there will still be challenges to garner enough action in the US market unless the opening up of Southeast Asian economies ramps up before its IPO,” he says.

Despite being late to the SPAC party, Eng believes that a potential SPAC IPO by AirAsia can generate investor interest “riding on what should hopefully be a successful listing by Grab and FWD to sustain interest in the US for Southeast Asian listings”.

“Because of the IPOs of Singapore-based e-commerce giant Sea Ltd and soon-to-come Grab and FWD, there could still be interest in Southeast Asian firms that list on the US SPAC market. Also, the SPAC route allows more control for founders via the different classes of shares.

“Additionally, it (AirAsia’s US IPO) is a post-Covid-19 recovery story which should resonate in the US, even if the travel recovery is much slower in our part of the world,” he adds.

The investment banker concurs, noting that a potential AirAsia SPAC IPO would appeal to local funds. “Some of these funds have a sizeable portion of their investments overseas. And these (such as AirAsia) are companies that are either based here or in the region, so the investing community knows them well. They understand these companies better, and are willing to ride on them. It will also depend on the value proposition that AirAsia offers investors.”

Fernandes, in a March interview with The Edge, had expected to secure RM1 billion in loans from three Malaysian banks under the Danajamin guarantee scheme. However, it is understood that one of the banks has decided to pull back on lending as the outlook for air travel recovery remains highly uncertain due to prolonged lockdown measures.

The proposed loans are part of the airline’s plans to raise between RM2 billion and RM2.5 billion in a combination of debt and equity funding to ensure sufficient liquidity for the group for the next two years. Some of the funding raised thus far comes from two tranches of private placement, which raised RM336 million, and a RM300 million loan from Sabah Development Bank Bhd.

AirAsia last week proposed a rights issue with free warrants to raise up to RM1 billion to provide enough short-term liquidity to the group. It plans to utilise 10% to 15% of the proceeds to grow its digital business.

Collectively, Fernandes and AirAsia co-founder Datuk Kamarudin Meranun, as well as their investment vehicles Tune Live Sdn Bhd and Tune Air Sdn Bhd, own 26.4% of the group, which would see them pumping in RM257 million if they exercise their rights.

In a July 13 note, Hong Leong Investment Bank Research says RM1 billion will not be able to fully cover AirAsia’s current negative shareholder’s equity position of RM1.6 billion as at end-March 2021, which is expected to deteriorate further with the ongoing operational losses at least for the next one year. “We remain concerned about the current negative equity position and the upcoming dilutive rights issue exercise. The overall aviation sector is still heavily affected by the ongoing uncertainty on Covid-19 cases, giving rise to ongoing strict lockdown measures in place.”

Faced with negative operating cash flow and negative equity, Kenanga Research says there will likely be further funding exercises via placements and borrowings/debt rescheduling. “Longer term, AirAsia’s fortune rests on how successfully it can turn around and transform itself into a digital travel and lifestyle company,” it adds.

“While AirAsia has been pitching its digital expansion side of the story, we remain concerned about this space, given that it will go up against dominant players such as Grab in the super app space across services such as ride hailing, food delivery, insurance and loans. This poses a risk of cash burn although management reaffirmed that it would enact prudence and a more targeted approach to grow profitability,” Nomura Global Markets Research said in a report last Tuesday.

“Furthermore, with many upcoming Asean-centric tech listings in the next 12 months, we still think aviation remains its core business where the operational aspect of the business is expected to be worse off than 2020, which had three months of normalised activity,” it added.

Nonetheless, the pivot from a pure-play airline to e-commerce and fintech is a smart one for AirAsia, according to the investment banker. “Even before the Covid-19 pandemic, AirAsia had been developing its non-airline businesses such as e-wallet app BigPay and logistics business for a few years. If they get it right, this will be much bigger than the airline business itself. That’s what they are betting on. They would be able to command a better valuation than an airline, I agree, but the caveat is if they get it right.”

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