Mergers and acquisitions are never an easy proposition—there’s always the likelihood that one group of stakeholders or the other will be left dissatisfied. Then there are regulatory clearances, including anti-trust issues and the like. United Arab Emirates’ national airline Etihad Airways PJSC started talking to Jet Airways (India) Ltd in September, soon after the government changed the rules. India now allows overseas carriers to hold as much as 49% of domestic airlines.
The deal involves Etihad buying a 24% stake in Jet, India’s second largest airline in terms of passengers carried, for about $300 million, according to people familiar with the terms. The transaction, which was expected to be announced this week, seems to have hit a glitch, however. The reasons for this can perhaps be read in the rather unusual way in which the deal has progressed thus far.
After the requisite due diligence by Etihad, the next order of business for the managements of both companies were meetings with the ministers of aviation, commerce and finance. These took place even before the respective boards got a chance to discuss and approve the proposal as is usually the case. Why was it so critical for the carriers to get the blessings of the government before proceeding with other matters? And what did Etihad Airways chairman Sheikh Hamed bin Zayed al-Nahyan mean when he said over the weekend that the Abu Dhabi-based airline needs to revise the deal to buy the stake in Jet Airways?
One concern that Etihad has is related to history. The government had in 1997 forced Jet to conform to the letter of the law and buy back a 40% stake from investors Gulf Air and Kuwait Airways. The law, until it was changed in September last year, stipulated that foreign airlines couldn’t be investors in domestic carriers. Etihad is worried that any policy flip-flop by a future administration would see it being forced to exit the stake and needs a legal assurance from the government that such an event will not come to pass. According to people aware of developments, Etihad has more or less agreed on valuation, operational and human resources issues; all it wants is government reassurance.
There are other factors as well—the deal makes sense because it gives Etihad the opportunity to increase flights to India and compete with Dubai-based rival Emirates. But that’s subject to getting more bilateral rights, something that’s dependent on the government. Another factor that will come into play is the opposition of state-run Air India Ltd, already struggling with its financial woes and in the midst of a government bailout, to the strengthening of a rival, especially one that will compete with it for passengers on the Gulf routes.
It’s easy to see why meeting the three ministers was important. Foreign direct investment is with Anand Sharma; permitting bilateral flying rights is with Ajit Singh; and the final word lies with P. Chidambaram, especially since any deal will involve a series of changes in the company’s structure due to its current ownership pattern.
Could this deal act as some sort of precedent whereby companies will first seek government benediction before their boards decide on the transaction? That’s hard to tell, given that aviation is an industry unlike many others in several respects. In the case of the Jet-Etihad deal, there will be more hurdles to be crossed, assuming that the boards get around to approving the stake purchase. These include the Foreign Investment Promotion Board, the Competition Commission of India and the security agencies. But then, that’s probably where the approving gaze of the government will carry weight.