OREANDA-NEWS. January 12, 2010. According to Kommersant, Minister of Transport Igor Levitin has suggested that control over Rosavia holding (which consolidates the aviation assets of Rostekhnologii) be transferred to Aeroflot. Rostekhnologii will get the 28% stake in Aeroflot currently owned by National Reserve Corporation (NRC).

Although the structure of the deal has yet to be clarified, Aeroflot will apparently buy the 28% stake from NRC and swap it for control in Rosavia. Aeroflot does not have spare cash, implying that it would raise capital. While its debt burden is quite significant (USD 1.3bn in net debt as of 3Q09), the lion's share is financial leasing obligations and long-term debt related to the construction of the just launched terminal at Sheremetyevo. Hence, both debt and equity are possible.

While industry consolidation on the basis of Aeroflot has always been seen by the company as a desirable scenario, taking over Rosavia with its large debt burden and near-bankrupt small airlines does not sound in the company's and shareholders' best interests. In our view, there are only two quality assets in Rosavia: Pulkovo-based GTK Rossija and Vladivostok avia (based in the Russian Far East). If one third of Aeroflot were to be swapped for control in Rosavia (or in the above two, for simplicity), the acquisition does not look cheap. On a 2009 EV/RPK (passenger turnover) basis, the companies would be valued at 0.1 (the same as Aeroflot). Given the inefficiencies at Rosavia and its disparate assets (different aircraft types, overlapping route networks, large debt burden), it might be better for Aeroflot to wait until Rosavia has gone bankrupt and then take over its routes.

However, depending on its terms, the deal might still turn out to be value-creative. It would allow Aeroflot to strengthen its leadership on the market significantly, primarily in the target domestic segment (the combined passenger flows of all Rosavia’s carriers and Aeroflot in 2009 was around 17 million passengers, implying an overall market share of around 40%), increasing the company’s presence in the Russian Far East and providing a good base to grow operations further. Previously, Aeroflot has been able to defend its interests.