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The government has finally managed to spark interest in the strategic disinvestment of Air India, having received multiple expressions of interest, according to the secretary of the department of investment and public asset management (DIPAM). Mint takes a deep dive.

Why is Air India seeing greater interest now?

The Union government has sweetened the deal for investors as the Air India Ltd sale evoked no response initially. This could have possibly encouraged interested buyers. For one, 100% of Air India is up for grabs, compared to just 76% earlier. The government also made a change in the terms of bidding by allowing potential investors to bid on the basis of enterprise value, which is equity value plus net debt. As a result, investors can determine the amount of Air India’s debt that they would want to take on, rather than being saddled with a fixed quantum of debt determined by the government.

Who are the potential bidders for the airline?

The names of the bidders have not been officially disclosed. Reports have said the Tata Group and a section of Air India’s staff, along with the US-based firm Interups Inc., are among the suitors for the airline. Some reports suggest that low-cost carrier SpiceJet Ltd has also expressed interest. Getting hold of Air India will give the Tata Group and SpiceJet a strong domestic presence, with the second highest market share by far, after IndiGo. Vistara can catch up on network coverage if it buys Air India’s operations and can leverage its image of being an aspirational airline, said analysts at Kotak Institutional Equities.

Race for share
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Race for share

What all does debt-laden Air India bring to the table?

Air India’s international operations and slots are the most coveted by potential acquirers, noted Kotak Institutional Equities analysts. The airline also has reasonable reach and network coverage in domestic market, which will help potential acquirers gain considerable scale. The airline brings a lot of debt too but most of it is likely to be borne by the government.

What will be the likely impact of AI-Tata deal?

If the Tata group bags Air India, it could pave way for consolidation in the aviation sector, say analysts. Tata Sons holds a 51% stake in Vistara and a majority stake in AirAsia India. Air India, AirAsia, and Vistara accounted for a combined domestic market share of 22.9% in October, according to data of the DGCA. The deal could make Tatas the second-largest player in the sector after IndiGo, which enjoys a market share of 55.5%. However, the Tatas would have to first simplify structures with partners in existing airlines.

Are there any hurdles for potential bidders?

Every asset is valuable only at a certain price. If the eventual bids are high relative to the asset value, turning the airline around could be challenging. In any case, the acquirer will need to make radical operational changes and cut costs to make the business viable. A group such as the Tatas, with deep pockets and a love for the aviation business, could well be willing to incur losses for longer than others. However, unless it streamlines its various aviation operations, it may only be setting up for a bigger failure with Air India acquisition.

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