Mumbai / New Delhi: US-based private equity fund WL Ross and Co. Llc. will invest about $80 million (Rs345 crore) in the New Delhi-based low-cost airline SpiceJet Ltd, an investment the new investor expects will sustain the airline’s operations for up to two years.
The move comes at a time when India’s air carriers are expected to post a combined loss of $2 billion due to rising jet fuel prices and SpiceJet, among others, is struggling to fill airplane seats.
New York-based WL Ross will buy $80 million in foreign currency convertible bonds, or FCCBs, of SpiceJet from Istithmar PJSC and Goldman Sachs Group Inc., said two people familiar with the deal, requesting anonymity, adding this will help the investor skirt the 49% foreign equity cap guidelines in the airline business. Already, 40.09% of the company is held by foreign investors.
A part of these FCCBs will be converted into equity. Partial conversion of this debt into equity will give the airline better financial ratios potentially enabling SpiceJet to raise more debt or equity.
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SpiceJet had raised $80 million FCCBs for pre-delivery (advance) payments of $77.5 million to Boeing Co. of the US for purchasing B737 planes. These advance payments will be released from Boeing to bond account of the company, that is meant to redeem bondholders in December 2010. With WL Ross buying out FCCBs from the existing bondholders, the company will be in a position to release a part of that. This will help in fresh fund infusion.
Investor Wilbur Ross pipped the Mumbai-based Kingfisher Airlines Ltd’s owner billionaire Vijay Mallya in the battle for SpiceJet.
Late Monday night, the SpiceJet board approved the offer. Ranjeet Nabha, managing director and CEO of WL Ross India, and Ross are now expected to join SpiceJet’s board.
Ross, dubbed the “bankruptcy investor” by Fortune magazine, is known to bottom-fish in markets in manufacturing and financial sectors, buying companies and later selling them when the business turns.
In an email interview with Mint, Ross said he was betting on crude prices, and hence aviation fuel costs, remaining high and that in this environment, low-cost carriers have an edge over full-service airlines. “Within the industry, we believe that the low-cost model has validity because even with gains, per capita income is still low by world standards, especially since oil prices are unlikely to retreat to their former lows,” he said. “We do believe that over the next year or two, prices are likely to stabilize down around $100 per barrel and financing for SpiceJet is intended to carry it through that period.”
Airlines have a sustainable business if they can hold the current crisis, he said. “We believe that there will be consolidation among low-cost carriers that will produce operating synergies and raise load factors. In short, we see a good future once we pass through the present crisis,” his email said.
WL Ross has “extensive experience of investing in the aviation sector”, said Bhupendra Kansagra and Ajay Singh, board members of SpiceJet, in a statement.
In February 2007, the Ross fund acquired OCM India Ltd, a worsted suiting maker, for around $37 million.
SpiceJet will have to call meeting of bondholders to reset the terms of SpiceJet FCCBs held by the new investor.
In his email reply, Ross did not comment on deal specifics except for saying, “We are mindful of the 49% foreign ownership limit set by the Indian Government and our investment will be structured to comply with it.” Mint couldn’t reach Singh to confirm terms of the deal.
A senior SpiceJet official who didn’t want to be quoted said the deal structure was being finalized by NM Rothschild and Sons (India) Pvt. Ltd, which advised SpiceJet, and will likely be announced on 16 July.
Mint reported the $80 million deal in a 15 July article. Mumbai-based Daily News & Analysis first reported the WL Ross interest in SpiceJet on 5 July. WL Ross has approximately $7.9 billion of assets under management.
Kansagra, who has 12.9% stake in the airline, clarified he is not selling his stake. “Does (someone who has just) inducted Rs350 crore in the company, indicate a promoter who is selling?” Kansagra said, when asked if he was still looking at selling his stake. “I am not selling.”
Kansagra said SpiceJet will continue to follow its business plan and there will be “no change of strategy” in SpiceJet’s business model.
SpiceJet, the second largest domestic budget airline with 10% share, operates 94 flights daily with a 15 aircraft fleet.
On a down day in Indian stock markets, SpiceJet shares fell 2.15% to close at Rs28.55 a share on the Bombay Stock Exchange. Most other airline shares were also down.
SpiceJet had announced net losses of Rs133.50 crore in the year through March, about 85% more than the Rs72.1 crore it lost the previous year.