Japan Air Seeks $8.5 Billion IPO After Exiting Bankruptcy

Japan Airlines Set to Raise About $8.5 Billion in IPO Next Month
The share offering will be the largest in Japan since Dai-Ichi Life Insurance Co. raised 1 trillion yen, including the exercise of overallotment options, in March 2010, according to data compiled by Bloomberg. Photographer: Junko Kimura/Bloomberg

Japan Airlines Co. will seek 663 billion yen ($8.5 billion) in the second-biggest initial public offering this year, completing a two-year turnaround from bankruptcy into the world’s most profitable carrier.

The airline will list on the Tokyo Stock Exchange on Sept. 19, it said today in a Ministry of Finance filing. Its government-backed owner will sell 175 million shares at a tentative price of 3,790 yen apiece. That values the carrier at about five times projected profit, less than half All Nippon Airways Co.’s about 12-times valuation.

The biggest initial public offering since Facebook Inc.’s marks JAL’s return after former Chairman Kazuo Inamori slashed jobs, cut debt and retired older, less fuel-efficient aircraft to revive profit. The proceeds will be used to return a 350 billion yen to the state-backed turnaround body that invested in the airline, while the government will get the remainder, a windfall of as much as 313 billion yen at the tentative price.

“The turnaround has been done extremely well,” said Peter Harbison, executive chairman at the Sydney-based Centre for Asia Pacific Aviation. “They’ve done a lot of sensible things in reducing routes and corporate complexity that dragged it down.”

JAL, which will get no money from the sale, yesterday reiterated its profit forecast of 130 billion yen for the year ending March 31, compared with 40 billion yen at larger Tokyo-based rival ANA.

The global average valuation for airlines worth at least $5 billion is 10 times estimated earnings, according to data compiled by Bloomberg.

Record Profit

JAL will displace ANA as the world’s fourth-largest airline by market value after the offering, according to current values and the tentative share-sale price. Latam Airlines Group SA is the largest at $11.3 billion, followed by Air China Ltd. at $10.9 billion and Singapore Airlines Ltd. at $10.1 billion.

“JAL is regarded pretty highly among market participants after improving its earnings,” said Ryota Himeno, an analyst at Barclays Securities Japan Ltd. “Still, with the emergence of low-cost carriers in Japan, and efforts from ANA, competition in the airline market is set to intensify.”

JAL posted a record profit of 187 billion yen, the equivalent of $2.4 billion, last fiscal year, more than twice that of Air China, the second-most profitable, with $1.1 billion, according to data compiled by Bloomberg.

Inamori’s Role

Japanese tycoon Inamori, who is also a Buddhist priest, had no experience managing an airline before he was asked by the prime minister to oversee the airline’s turnaround in 2010. The 80-year-old is the founder of Kyocera Corp., one of the nation’s largest makers of electronic parts, and also set up one of the founding companies of KDDI Corp., the nation’s second-biggest wireless operator.

The Enterprise Initiative Turnaround Corp. of Japan, the government-backed body that funded JAL’s restructuring, will sell its 97 percent stake in the IPO.

The share offering will be the largest in Japan since Dai-Ichi Life Insurance Co. raised 1 trillion yen, including the exercise of overallotment options, in March 2010, according to data compiled by Bloomberg.

Daiwa Securities Co. is managing JAL’s IPO in Japan along with firms including Nomura Securities Co. and Mizuho Securities Co., according to the prospectus. Merrill Lynch International and Morgan Stanley & Co. International Plc. will manage the offering outside Japan, along with Daiwa Capital Markets Europe Ltd.

Low-Cost Revolution

The sale comes as JAL and ANA begin competing in the low-cost travel market because of rising demand for budget flights.

AirAsia Japan Co., a venture between ANA and AirAsia Bhd., this week became the third budget airline to start flights in the country this year. ANA affiliate Peach Aviation Ltd. started operations in March and Jetstar Japan Co., whose owners include JAL and Qantas Airways Co., began flying last month.

ANA is also selling shares. The carrier said last month it expects to raise as much as 175 billion yen by selling 1 billion new shares to pay for new aircraft and finance acquisitions. Net income was 668 million yen in the first quarter, compared with an 8.5 billion yen loss a year earlier, the carrier said today in a statement. Sales rose 13 percent in the quarter to 343 billion yen.

Dividend Outlook

JAL said it aims to pay dividends of about 15 percent of net income, according to the prospectus. ANA has said it is targeting a payout of 25 percent of profit.

Tokyo-based ANA fell 1.7 percent to 177 yen as of the close in Tokyo trading, extending this year’s decline to 18 percent. The benchmark Nikkei 225 Stock Average has gained 1.2 percent this year.

JAL slashed dozens of flights during restructuring, including services to Milan, Rome and Amsterdam, as it retired its fleet of Boeing Co. 747 planes and other aircraft. It cut 28 international routes and 41 domestic ones over the three years to the end of March 2011. The cuts also meant JAL surrendered its title as Japan’s largest carrier to ANA.

JAL flew about 35.8 million passengers on international and domestic routes last fiscal year, compared with 42.6 million passengers for ANA.

The then-bankrupt carrier cut about a third of its workforce, about 16,000 people, under the leadership of Inamori, who is now chairman emeritus, more than double the number suggested by the previous president Haruka Nishimatsu.

Expanding Internationally

JAL is now expanding internationally as it adds flights with Boeing’s more fuel-efficient 787 planes and teams up with other airlines to tap their networks. The carrier began flights to Boston in April and it plans to start service to San Diego and Helsinki as well.

The carrier chose to stay with AMR Corp.’s American Airlines in the Oneworld alliance in 2010, rejecting an offer from Delta Air Lines Inc. to join Skyteam, which included loans to help its restructuring.

JAL and American Airlines last year started a venture on Pacific flights that sets fares, sells tickets and decides schedules on routes to boost sales and pare costs. The Japanese carrier is also discussing a venture with British Airways on European routes. British Airways has said it would consider buying a stake in JAL.

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