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Jet, Sahara restart merger  negotiations

Jet, Sahara restart merger  negotiations
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First Published: Wed, Apr 11 2007. 12 28 AM IST
Updated: Wed, Apr 11 2007. 12 28 AM IST
New Delhi: Faced with the possibility of losing at least Rs 500 crore to Air Sahara over a failed 2006 merger attempt, Jet Airways India Ltd is believed to have agreed to purchase its beleaguered competitor for a total consideration of between Rs1,900 crore and Rs2,000 crore, according to a senior executive at Air Sahara as well as other industry executives in the know.
The exact amount remains unclear as the companies have one more day to negotiate prices and different amounts were being talked about late Tuesday. But the Rs1,900-2,000 crore range, according to these officials, includes Rs500 crore still left in an escrow account that the two airlines created at the time of the failed 2006 merger attempt, as well as about Rs550 crore in other adjustments.
These adjustments include up to Rs200 crore in debt; Rs180 crore that Jet Airways spent in operating Air Sahara during the earlier pre-merger phase; interest on the escrow account; and changes in the values of assets such as helicopters and immovable properties, said the Air Sahara official who didn’t want to be named.
Another person in Mumbai who is also close to the unfolding developments said the remaining nearly Rs1,000 crore will be in a cash payment to Sahara, in instalments.
Jet Airways chairman Naresh Goyal and chief executive Wolfgang Prock-Schauer declined to comment and Air Sahara president Alok Sharma did not return calls.
“Both sides exchanged amended share purchase agreements at today’s meetings. The agreeements will be scrutinized on Wednesday by lawyers,” said this person close to the negotiations.
Jet shares closed at Rs644.85, up Re0.70 on the Bombay Stock Exchange, where the shares are trading sharply off their 52-week high of Rs1,058.90. The company had its initial public offering at Rs1,100 in March 2005.
For any merger to go through, both companies must present the proposal to a three-judge panel and also obtain regulatory approval. A spokeswoman with the ministry of civil aviation said it was unlikely that the government would have any specific objections to the merger, given that it had just approved a merger for the state-owned carriers.
If the merger is carried out before the Competition Commission of India is formally established in May, it will not be investigated by the government. If, however, the merger is not completed by then, the authorites might look into how the market is affected by the merger, especially at the key metro routes and related issues, said Vinod Dhall, acting chairman of the commission.
If it goes through, the deal would give Jet more than 32% of the domestic aviation market by passengers, and add at least 27 aircraft to its 62-aircraft fleet, in addition to prime landing and take-off slots at major airports such as Heathrow at London, New Delhi and Mumbai. It would become the only privately owned Indian airline with permission to fly overseas.
Still, the prices being cited appear too high for an airline in an unprofitable market that owns none of its planes and has few other assets, says Peter Negline, a Hong-Kong based analyst for JPMorgan.
“This is a move by Jet Airways to be seen walking away with at least something from the whole deal,” said Negline. “We will be interested in seeing how they justify the purchase price over time, considering that the prospects for the sector are not likely to improve in the near term.”
The unexpected developments came two days into a week-long, court-monitored arbitration between Jet and Sahara over the original failed merger. In January 2006, Jet agreed to buy Sahara for Rs2,200 crore, placing Rs2,000 crore into an escrow account to complete the transaction, and spending an additional Rs180 crore in operating Sahara for four months, according to its 2006 annual report.
But in June, Jet walked away from the merger, citing regulatory problems and dissatisfaction with Sahara’s valuation. A Mumbai court later allowed Jet to withdraw Rs1,500 crore from the ICICI Bank Ltd escrow account against bank guarantees. The arbitration panel was to decide this week if Jet, which is 80% owned by Goyal’s Tail Winds Ltd, could get back the remaining Rs500 crore, or if it owed Sahara, owned by Sahara India Corp. Ltd, any additional money.
“Imagine that you are Naresh Goyal, and there is the real risk of losing almost Rs700 crore (the amount still left in escrow plus the cost of running Sahara for six months), you have to think about the best way out,” said a Mumbai-based aviation analyst for a major foreign bank, which does not authorize its analysts to use their names when speaking to the media. “So either you can lose all of that money, or pay double that amount and get whatever Sahara has to offer and see what you can do with it.”
Jet, currently seeking at least $400 million in private-equity funds to finance its still unprofitable, yet growing, international operations, is unlikely to need to raise any extra funds to complete the acquisition. Its 2006 annual report showed it had Rs2,100 crore in cash and Rs200 crore in bank guarantees, in addition to Rs1,500 crore it had set aside for the merger with Sahara. The airline’s current market capitalization is Rs5,567 crore, making Goyal one of the country’s richest men.
In the last months of 2005, both Jet and United Breweries Ltd-owned Kingfisher Airlines, which had just been launched by liquor baron Vijay Mallya, had competed for Sahara. Mallya dropped out of the bidding when Jet raised its offer to Rs2,200 crore. Since then, Kingfisher Airlines’ 11% market share has surpassed Air Sahara’s, which has lost half of its market share in the last year, dropping to 8% in February 2007, the last month for which figures are available.
In a telephone interview from Europe, Mallya would only say: “All I can say is, good luck to Jet.”
Sahara has been among the worst hit by the bitter competition in India’s booming aviation market, which is still largely unprofitable. The entire industry lost $250 million in 2006, and stands to lose double that in 2007, according to a study by the Sydney-based Centre for Asia Pacific Aviation.
Sahara’s market share declined during a time of phenomenal passenger traffic growth—40% in 2006 alone —and at least four of its airplanes were grounded through the beginning of this year for repairs and maintenance. It has cut back on its international operations, sending back two long-haul Boeing 767s to their original lessors in the past year.
In an unrelated interview with Mint in late March, Sahara’s Sharma said the airline was performing spectacularly. “Our revenues are up almost 300% from June 2006, and our yields are twice the industry average,” he maintained.
While it is not possible to independently verify those claims, yields (industry jargon for how much money an airline makes per passenger) of Rs5,000, as Sharma claimed, would put Sahara’s passenger performance above that of market leader Jet. Sharma said that by better utilizing his existing airplanes and adding one lakh extra seats to his inventory, Sahara would try and reclaim some or all of its lost market share.
At the same time, Jet has found itself facing turbulence as low-fare airlines and full-service carriers such as Kingfisher have siphoned away market share.
At one point, Jet flew four out of every 10 domestic passengers, but now only one in four pick the 14-year-old airline, though the market itself has grown significantly. In 2006, it used the meagre profits from its domestic operations to finance its international expansion, but will now need to raise at least Rs3,000 crore in fresh equity to pay for the 20 new wide-body aircraft it will induct into its fleet starting mid-2007, according a report by Negline, the JP Morgan analyst.
At that point, its net debt will be twice its equity, which is the upper limit for obtaining cheap export credit financing for aircraft, forcing Jet Airways to depend on more expensive loans.
For the industry at large, the possible merger has broad implications. It will divide the market for private full service airlines into two key players: the newly merged airline and two-year-old Kingfisher, which does not have permission to fly abroad (although it is hoping to fly into India from the US later this year by launching a US-based subsidiary). At the same time, Sahara’s prices often competed with those of the low-cost airlines, such as Deccan Aviation-owned Air Deccan, and Spicejet.
“Between them, Jet Airways-Air Sahara and the state owned airlines will have 50% of the market and 65% of the national fleet,” said Kapil Kaul, a New Delhi-based analyst with CAPA. “If we see one more consolidation, it could tilt the entire pendulum towards these three players, and that is going to have an impact on the industry, passengers and everybody.”
Sagar Malviya and P. Manoj in Mumbai contributed to this story.
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First Published: Wed, Apr 11 2007. 12 28 AM IST
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