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Investors punish Jet over Sahara deal

Investors punish Jet over Sahara deal
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First Published: Thu, Apr 12 2007. 02 05 AM IST

Updated: Thu, Apr 12 2007. 02 05 AM IST
Late on Tuesday, as lawyers for Jet Airways and Air Sahara huddled on the 21st floor of the Hilton Towers in Mumbai, hammering out the details of a possible merger, Jet Airways’ CEO Wolfgang Prock-Schauer was boarding a commercial flight from Vienna.
He had spent the last week there, celebrating Easter with his family, but Tuesday morning, Prock-Schauer first learned about the merger talks when a reporter called him on his mobile, according to a close friend and colleague.
Eight hours later, by the time his flight landed, details of the deal were on the front pages of the newspapers that greeted him on his way out of the airport. “I always knew that I was the CEO in name alone,” he told the friend, a senior official at Jet. “I had no clue that this was even happening.”
Now, as Jet Airways India Ltd and Sahara India Corp. Ltd-owned Air Sahara work out the contours of a deal that many analysts are calling a terrible idea, and one that the stock market is snubbing big-time(See graphic: the numbers game)—Rs316 crore in market capitalization was cut Wednesday—Prock-Schauer, 50, has told other friends and colleagues that he is looking hard for another job, even though his five-year contract with Jet Airways is yet to be completed.
“Without doubt, the Jet Airways CEO is not involved in many of the major decisions at the airline,” said Rajesh Verma, an executive vice-president of operations at United Breweries’ Kingfisher Airlines, a Jet Airways competitor. Verma should know. Until last year, he had spent 10 years at Jet, most recently as general manager of in-flight services.
Prock-Schauer, through a Jet Airways spokeswoman, declined comment.
That deal will likely be announced on Thursday, after a three-judge arbitration panel is presented with an agreement finalized between Jet Airways chairman Naresh Goyal, whose company Tail Winds Ltd owns 80% of the airline, and officials from Air Sahara.
According to several officials at both companies, the deal will likely value Air Sahara at approximately Rs2,000 crore, but Jet Airways will pay less than that up front, because Rs500 crore of its money is already lying in an ICICI Bank Ltd escrow account, remnants of a failed merger attempt last year. In addition, Jet Airways will also be allowed to subtract Air Sahara’s debt of about Rs200 crore, and Rs180 crore that it spent operating Air Sahara during the six months of the failed merger.
Late Wednesday night, though, it appeared that the deal might yet go through some last-minute revisions. Jet officials, people familiar with the development said, were chastened by the over 5%, drop in Jet’s value and both sides were trying to negotiate the size and number of instalments in which it would receive the payments, conditions the Jet team was pushing for before the transaction closes, and link the deal value to the condition of Sahara’s aircraft.
Notwithstanding the last-minute wrangling, if Air Sahara were to be valued at Rs2,000 crore or thereabouts, Jet would be paying a big premium for an airline that most analysts felt is worth far less, and one that is operating mostly at a loss.
More importantly, they said, Jet would be paying almost the same amount today for a beleaguered airline that has lost almost half its market share in the year and a half since Jet Airways first attempted a buyout for Rs2,200 crore in January 2006.
“The deal seems more like a compromise,” said Damien Horth, an analyst with UBS.
And the compromise, as Horth called it, is costing Jet dearly. Several analysts who watch the aviation sector closely struggled to put a value on privately held Air Sahara’s net assets at anything more than Rs200 crore. Those assets include some properties at or near airports, the hangars at which it parks its planes (but not the airport space they occupy), and other infrastructure at the airports. At the same time, Air Sahara leases all its aircraft, spending about Rs450 crore a year on lease payments, according to calculations based on international lease rates for its 27 fleet done by Hong Kong-based JPMorgan analyst Peter Negline.
Guessing Air Sahara’s cash flow is even harder.
It generated no more than Rs700 crore a year in revenues from passenger traffic, assuming a yield of about Rs3,000 per passenger it flew last year. With cargo and other activities, Air Sahara could conceivably have earned Rs1,000 crore in revenues last year according to conservative estimates, or Rs1,500 crore at the most, according to a more liberal calculation by Kapil Kaul, a New Delhi-based analyst for the Centre for Asia Pacific Aviation.
“But even at Rs1,500 crore of revenues, Rs2,000 crore is too high a price to pay for Air Sahara,” he said.
Kaul estimated the entire enterprise value, including the value of equity, debt and other receivables, should be no higher than Rs1,300-1,400 crore, saying that he felt factors other than the value of Air Sahara had resulted in the unreasonably higher valuation for the airline.
Other analysts, comparing the airlines market share with that of Deccan Aviation-owned Air Deccan and Spicejet, which are publicly traded, said they felt that the airline ought to be valued at around Rs1,000 crore.
The current price was agreed upon during court-monitored arbitration over whether or not Jet owed Air Sahara anywhere between Rs500 crore and Rs2,000 crore over the failed merger. In June 2006, Jet had abandoned its attempt to acquire Air Sahara and the ensuing court battles resulted in the current arbitration.
But Jet Airways does get some advantages from the deal: parking bays and landing and take-off slots at the major metro airports and, perhaps more importantly, in a country with a severe shortage of pilots, the almost 300 of Sahara’s pilots. These will bring its total pilots to above 950. Assuming that it is able to hold on to most of Air Sahara’s current customers and transfer them over to Jet—no mean task in this competitive industry, it would increase its market share by about 8%, paying about Rs7,500 per passenger— almost a fifth more than the suitor values its own passengers calculated by market capitalization per passenger.
But, before it can integrate the Air Sahara fleet with its own, and carry out a complete merger, Jet will spend another Rs500 crore, according to estimates by Kaul and Negline, the JPMorgan analyst. “It costs real money to paint the planes, to integrate the fleets, to redo the seating configurations,” said Negline, who estimated that Jet could spend at least Rs2 crore on each plane before it is completely assimilated into Jet’s fleet.
“This will be the defining moment for Jet,” said Kaul. “But if the pain (is) absorbed, you can make a more robust and healthy company. But there’s no guarantee.”
Sagar Malviya and Tarun Shukla contributed to the story.
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First Published: Thu, Apr 12 2007. 02 05 AM IST
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