Ending three days of intense negotiations, and almost a year-long legal dispute, Jet Airways India Ltd informed the Bombay Stock Exchange (BSE) that it is buying Sahara Airlines Ltd.
Jet Airways, in a statement to BSE, said it would pay Rs1,450 crore in cash through several interest-free instalments through March 2011. The Rs500 crore that was left behind in an escrow account, created in a previous, failed merger attempt early last year and at the heart of the legal dispute, becomes the first payment, followed by a tranche of Rs400 crore to be paid by 20 April.
“It is a good deal which will help us,” said Jet Airways chairman and promoter Naresh Goyal, whose company Tail Winds Ltd, owns 80% of the airline. Referring to a price that the two airlines had previously agreed upon in 2006, he said “the deal is 40% cheaper than the one (Rs2,300 crore deal) signed last year.”
The stock market loved the news, pushing Jet Airways stocks up by Rs19.75, to close at Rs628.65, a gain of 3.2%, smartly recovering some of the losses of earlier this week when news of the pending deal first emerged.
But Alok Sharma, the president of Air Sahara, the 14-year-old airline operated by Sahara Airlines, said after the deal was completed that the airline was valued at Rs1,950 crore. That’s the same number that had prompted the share market to punish Jet shares on Wednesday
“Sorry, I cannot go into details,” said Sharma, when asked about the difference in prices. “We are bound by some confidentiality clause.”
The difference of Rs500 crore between the two figures is made up of Rs150 crore of Sahara liabilities that will eventually show on Jet balance sheet as debt, Rs180 crore that Jet had already spent operating Air Sahara during the 2006 aborted acquisition and described as a loan to Sahara on its own balance sheet, Rs50 crore in interest on the escrow account that Sahara will retain, and Rs120 crore worth of assets that Sahara will hold on to after selling the rest of the business, including four helicopters and property, according to a person closely involved in the negotiations, who did not want to be identified because he was not authorized to speak to the media.
“Considering how important this deal is to Jet Airways, and considering what it represents of the shareholders funds, we hope that they will be very forthcoming in the full details of the deal to investors as soon as the deal is closed,” said Peter Negline, a Hong Kong-based analyst with JP Morgan who has followed the deal closely. “Markets generally don’t like uncertainty, and it’s exacerbated in this case because the deal is taking so long.”
Jet executive director Saroj Dutta declined to comment and CEO Wolfgang Prock-Schauer couldn’t be reached. A spokesperson, speaking after a short briefing by Goyal and Jet lawyer Harish Salve in Mumbai, would only say the acquisition would be good for the company, and that details of the deal would be made public on 16 April.
“The dispute has been settled amicably,” said Salve. “Jet is known for its quality of service and not for its litigation.”
At the New Delhi offices of Lucknow-based Air Sahara, which is owned by Sahara India Corp. Ltd, Sharma, the airlines’ president, said he was quite happy with the deal. When asked if the Jet had driven a hard bargain, he smiled for a few seconds and said: “I can’t comment. All I want is two minutes for myself right now.”
A person involved in the transaction said the Jet team made its opening offer on Monday of Rs1,600 crore. Negotiations then continued for another 27 hours before both sides agreed on an enterprise value on Tuesday afternoon. Some 30 lawyers were camped in Mumbai’s Oberoi hotel. While Goyal was at the Oberoi, he didn’t participate directly in the negotiations. Sahara India’s Subrata Roy was at the Sahara-owned Centaur Hotel near the Mumbai domestic airport.
Sharma will likely not continue as part of the merged airlines upper management, said the person who was involved in the negotiations, along with about half of Air Sahara’s employees. “People who want to remain with Sahara or people who are not absorbed will be rehabilitated, relocated, readjusted and reaccommodated in the Sahara group,” Sharma said,.
It is likely that the Air Sahara fleet may be converted by Jet into a low-cost airline, so that the new owner can make inroads into a category that has gained ground.
“With two dozen aircraft and its financial strength, it can certainly take on the largest low-cost carrier, Air Deccan, ” said Rajeev Batra, an executive director at KPMG, which provides advisory services to airlines. “Size does matter for airlines now.”
The Air Sahara brand can be used by Jet Airways for up to six months, the person involved in discussions between the two airlines said. Separately, Sharma said the brand will be used by the Sahara Group’s four helicopters.
Jet will inherit Air Sahara’s 20 Boeing leased planes, five of which will soon be returned to their original lessors, unless Jet decides to renew the leases. It will also inherit the seven Canadian Regional Jets, smaller aircraft that Air Sahara used on metro routes, but at least four of those are grounded because of maintenance issues, said a Sahara spokesperson. Jet’s pilot pool could swell by 265 if all of Air Sahara’s pilots are absorbed, a key advantage at a time when India faces a shortage of 5,000 pilots in the next five years, according to government estimates. Air Sahara’s flight training institute in Mahipalpur, near the New Delhi airport, will also change ownership. “It doesn’t have a (flight) simulator,” said Sharma. “Even the premises are on lease.”
Under the ministry of civil aviation’s merger policies, Jet will get to use Air Sahara’s landing and take-off slots at major airports, where those slots are difficult to procure because of infrastructure shortages. It will also get to use Air Sahara’s parking bays at those airports, which would reduce some costs because it could store some aircraft overnight at key locations rather than scattered around the country.
Jet, India’s largest domestic airline by market share, will have one key benefit after the merger: it will become the only private airline allowed to fly overseas. In January 2008, if the government decides not to review a three-year ban imposed in 2004, it will have permission to fly to countries in the Gulf region, where almost two million non-resident Indians offer a lucrative market that, until now, was restricted to just the state-owned airlines, Air India and Indian, and to Gulf airlines, such as Qatar Airways and Etihad. Both those airlines will be formidable competitors: Qatar Airways, for instance, plans to fly high capacity Airbus A380s to India starting 2009, after having received permission from the Indian government to double its weekly flights to India.
Domestically, if all of Air Sahara’s passengers stick with the new owner, Jet will increase its domination of the Indian market, with one out of every three fliers ending up with the airline.
(P. Manoj in Mumbai contributed to this story, along with inputs from Associated Press and PTI.)