Is the government’s 100% stake offload offer enough to move the needle on the Air India sale?
Much depends on the avatar in which they will sell it and the debt they will put on the books
After the faux pas with the Air India sale process last year, the government is making its second, and final, attempt to find a buyer. Civil aviation minister Hardeep Singh Puri told Parliament on Wednesday: “The airline will have to close down if it’s not privatized."
The initial signs for the now-or-never sale are encouraging. The government said that it has now decided to divest a 100% stake in the airline, unlike the previous attempt, where it had decided to retain a 24% stake.
But there’s a $4 billion question—the amount of debt the buyer of the airline will reportedly be saddled with. Is the 100% stake sale enough to move the needle?
“It depends in what avatar they will sell it and how much debt they will put on the books," said Shannon Attari, executive director at Seabury Capital Group Llc, aviation specialists in restructuring and investment banking.
According to news reports, the government may exclude $7 billion of Air India’s $11 billion (or ₹78,100 crore) debt to attract buyers. But even if the government settles for a nominal ₹1 valuation for its equity, that would still mean a hefty valuation for the airline.
Last year, when a somewhat similar amount of debt was proposed to be left with the airline, analysts at Kotak Institutional Equities had said: “We believe the acquirer would need to bring a significant amount of operational improvement to generate value from the transaction." They had assumed zero equity value for the stake sale.
In short, the amount of debt left on Air India’s books can make or break the deal.
Another important factor, as Attari said, is the way the sale is structured. The prized asset within Air India is its international operations, and the government would do well to carve it out to extract the best value.
“For international operations, one needs bilateral rights of India, and Air India has plenty of them," said Praveen Sahay, deputy vice president (equity research) at Edelweiss Broking Ltd. “Air India sale can be successful if the airline is broken down in three broad pieces: 1) international operations, 2) express services, which they do locally, and 3) ground handing and catering services."
Note that InterGlobe Aviation Ltd, which runs India’s largest airline by market share IndiGo, was interested in the acquisition of Air India’s international operations and Air India Express. Given that this option was not available last year, InterGlobe had decided not to pursue the sale. Of course, the domestic piece may be interesting to some others, such as the Tata group.
It’s fair to say that a piecemeal approach will result in better overall interest and demand. If the government truly sees this as a now-or-never situation, it had better put its best foot forward while drafting the terms and conditions for the sale.