PM – Liat, Star merger a sound business decision

The Commercial alliance between Caribbean Star and LIAT was a sound business decision by all the parties involved; it was not grounded in any act of charity or philanthropy by Texan billionaire Sir Allen Stanford.

Prime Minister Dr Ralph Gonsalves made this clear when he addressed the local media on his return from the Organization of Eastern Caribbean States’ (OECS) 44th summit in Antigua last Friday, January 12.{{more}}

“Mr Stanford made it clear to us that he wants to get out of the airline business; he did not know that it was going to cost so much,” Dr Gonsalves said.

He said that the merger was as important to Caribbean Star as it was to LIAT because Caribbean Star was losing more money than LIAT.

Saying that he was satisfied that there was now a framework that was in the best interest of St Vincent and the Grenadines and the Caribbean on a whole, Dr Gonsalves announced the particulars of the commercial alliance which will take effect on February 1, leading to a full merger in due course.

The new entity would be called LIAT – Star of the Caribbean and would operate a fleet of 16 aircraft with two others in reserve. LIAT will operate and staff 10 aircraft with Caribbean Star operating the other six. This is down from the fleet of 25 they together operate presently.

“Immediately we should see a stemming of the financial hemorrhaging that both airlines were suffering,” said Dr Gonsalves.

The code LI, which is LIAT’s , would be used on all flights in the alliance and reservations will also be done by LIAT. Caribbean Star will stop selling air services and the two partners will share revenue and losses.

“It is a leap of faith by Caribbean Star and it is at a point of no return,” said Dr Gonsalves.

A plan has also been put in place to deal with the mountain of debt with which LIAT is saddled. A figure of US$55 million was determined as what would be needed to pay severance and other associated costs to staffers who might be affected by the LIAT/Caribbean Star merger and to pay outstanding creditors.

Monies are owed to the Antiguan Commercial Bank and to various companies for spare parts among others.

Another creditor is the Export Development Organization of Canada, which is owed some US$41 million for three aircrafts. Dr Gonsalves told reporters that this debt is expected to be liquidated to a range of between US$5.5 to US$ 7.5 million.

The Antigua government has assumed responsibility for the first US$20 million and the other US$35 million will be a loan from the Stanford Financial Group of Companies, owned by Sir Allen Stanford of Caribbean Star.

Describing the plan as “a most creative mode of financing,” Dr Gonsalves explained that the three major shareholder Governments would guarantee the loan. Barbados would guarantee US$25 million, Antigua & Barbuda US$8 million while St Vincent and the Grenadines’ portion would be US$2 million.

He explained that the strategy that would be used by Stanford’s company would be to raise an “initial public offering” to raise money for the new airline. He said that the Stanford group is confident that they would be able to raise the money needed. However if this effort fails then the Governments will not be required to pay until the airline begins to make money.

An “initial public offering” is the first sale of stock by a private company to the public. It is often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded.

“Initial public offerings” can be a risky investment as it is tough to predict what the stock will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most “public offerings” are companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value.