Etihad to buy 24% stake in Jet Airways for $379 million

Jet board approves preferential allotment of 27 million shares to Etihad at a price of not less than Rs.754.74 apiece
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First Published: Wed, Apr 24 2013. 08 53 AM IST
The deal will make Jet Airways the first Indian carrier to take advantage of rules introduced by the government in September allowing a foreign airline to pick up a stake of as much as 49%. Photo: Priyanka Parashar/Mint
The deal will make Jet Airways the first Indian carrier to take advantage of rules introduced by the government in September allowing a foreign airline to pick up a stake of as much as 49%. Photo: Priyanka Parashar/Mint
Updated: Thu, Apr 25 2013. 12 28 AM IST
Mumbai: Etihad Airways PJSC has agreed to acquire a 24% stake in Jet Airways (India) Ltd for $379 million (around Rs.2,060 crore), the companies announced on Wednesday, setting the stage for the Mumbai-based airline to become the first beneficiary of a policy change that allowed foreign airlines to invest in domestic ones.
Sweetening the deal, India signed a new bilateral agreement with Abu Dhabi on Wednesday, expanding the number of weekly seats available on flights between India and the United Arab Emirates (UAE) almost fourfold to 50,000 seats over a period of three years from 13,330 at present.
“Etihad Airways’ wider overall commitment to Jet Airways includes the injection of $220 million to create and strengthen a wide-ranging partnership between the two carriers,” the UAE national carrier said in its evening announcement. This amount refers to money paid to Jet for slots at Heathrow Airport, London, and payment for a majority stake in its frequent flier programme.
The board of Jet Airways, controlled by non-resident Indian businessman Naresh Goyal, said earlier on Wednesday that it had approved the sale of the stake to Etihad.
The board approved the sale by way of a preferential allotment of 27 million shares to Etihad Airways at a price of not less than Rs.754.74 apiece. This is at a premium to the Tuesday closing price of Rs.573.85, when the stock rose 12.12%. Indian stock markets were closed Wednesday for a religious holiday.
“The approval of the shareholders for such issuance and allotment will be sought at an extraordinary general meeting (EGM) to be held in this regard,” Jet Airways said in a statement.
The deal is taking place in the teeth of opposition by airlines and airports. Airlines object to the government favouring a deal by making a substantial increase in bilateral flying rights to Abu Dhabi in order to nudge Etihad into buying the Jet Airways stake. Airports have said the move will kill their attempt to create a global hub within the country.
An investment banker who advised on the deal confirmed that Jet Airways will get $379 million for selling the stake. This will also make Goyal compliant with the capital market regulation on bringing down promoters’ stake below 75%, the banker said.
The deal will make Jet Airways the first Indian airline to take advantage of rules introduced by the government in September allowing a foreign airline to pick up a stake of as much as 49%. The Abu Dhabi-based national airline of the UAE will acquire shares by way of new stock and the dilution of Goyal’s 80% holding, which will drop to 60.8%.
Following the deal, public shareholders will own 15.2% of Jet Airways, less than the minimum public holding norm of 25% that companies are required to meet by a July deadline. To meet the norm, Jet Airways will first launch a so-called offer for sale (OFS) of shares to lower the promoter’s holding. After the OFS, Goyal will hold a 51% stake, public shareholders 25%, and Etihad 24%.
“This is a smart move for Jet,” said Nawal Taneja, professor emeritus in the department of aviation at Ohio State University, about the deal.
“There are few viable options for small, resource-constrained airlines such as Jet in a world that is likely to be occupied by large global players in traditional alliances (OneWorld, Skyteam and Star Alliance) or equity-based alliances such as those being developed by Etihad. Jet can use this arrangement to finally develop a viable strategic brand and offer an attractive value proposition,” Taneja said.
The stake sale will help Jet Airways reduce debt, which stood at $2.16 billion on 31 December 2012. Jet Airways is also expected to sign an agreement to lease its Airbus 330 plane to Etihad, raising more funds that it can use to repay high-cost debt. Earlier this year, the UAE airline purchased the Heathrow Airport slots of Jet Airways for $70 million.
Jet Airways will get $150 million from Etihad for a majority stake in its Jet Privilege loyalty programme, the companies said. Jet is also expected to get a loan of about $150 million from the lenders of Etihad Airways at a 3% interest rate, according to persons close to the development.
Aviation analysts said the development is positive.
“It is healthy for aviation in India as in any other country to internationalize the investor base,” said Craig Jenks, president of New York-based consultancy firm Airline/Aircraft Projects Inc.
Jenks cited the recent purchase of a 49% stake in Virgin Atlantic Airways Ltd by Delta Air Lines Inc. of the US from Singapore Airlines Ltd.
“No one in the UK complained about a takeover by Americans. The main airline of Brazil, TAM Airlines, was taken over by an airline in Chile. Swiss (Air) is owned by Lufthansa in Germany. KLM (Holland) is now owned by Air France. Etihad itself owns large stakes in other airlines, such as Air Berlin in Germany. AirAsia leads joint ventures in several countries,” Jenks said.
Eithad owns stock in Air Seychelles, Virgin Australia and Aer Lingus, apart from Air Berlin.
Jenks added that Etihad is facing intense competition from Dubai’s Emirates, and deals with foreign airlines are a good way to build market share. Wealthy Abu Dhabi is looking for overseas investment avenues in any case, he said.
Jet Airways could get an added benefit from its relationship, Jenks said.
“An interesting twist here is that the UAE is apparently about to get a deal with the US to put a so-called US pre-clearance facility at the Abu Dhabi airport. Etihad itself would be the main beneficiary, but so would Jet. Passengers would take its flights from Indian regional airports to Abu Dhabi, so as to enter the US at that airport, to avoid the long lines at JFK and other US airports,” Jenks said.
Etihad Airways, which began operations in 2003, serves 86 cities in West Asia, Africa, Australia, Asia, Europe and North America, with a fleet of 70 Airbus and Boeing aircraft. It has at least 90 aircraft on firm order, including 10 Airbus A380s, the world’s largest passenger aircraft. Jet Airways currently operates a fleet of 100 aircraft and flies to 73 destinations in India and at least 20 overseas.
Jet Airways is also set to shift one-third of its international operations to Abu Dhabi.
Starting 16 May, Jet Airways will connect Kuwait via Abu Dhabi from Kochi instead of a direct flight, and the airline will explore similar options such as flying to Najaf in Iraq, Cairo in Egypt, Beirut in Lebanon, and Amman in Jordan via Abu Dhabi.
This would be the second time Jet Airways gets foreign direct investment.
In 1993, Kuwait Airways and Gulf Air bought 20% each in Tail Winds Ltd, an overseas corporate body owned by Goyal, which held all of Jet Airways’ stock. But in April 1997, the ministry of civil aviation ordered Jet Airways to conform to the rule that overseas airlines should not hold stock in Indian carriers (a rule that was changed in September last year). Goyal had then acquired the 40% holding.
Etihad and Jet Airways were expected to announce the deal in the second week of February, but the Arab carrier was said to have sought an assurance from the Indian government against any policy reversal that would mean being forced into making a similar exit.
Jet Airways was incorporated on 1 April 1992 as a private company and commenced operations as an air taxi operator on 5 May 1993 with a fleet of four leased Boeing 737 aircraft. The airline was granted scheduled airline status (allowing it to have a network timetable) on 14 January 1995.
Tarun Shukla in New Delhi contributed to this story.
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First Published: Wed, Apr 24 2013. 08 53 AM IST
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