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The Tata Group will merge Air India and Vistara, with partner Singapore Airlines holding 25.1% of the merged entity, creating an airline that could potentially challenge market leader IndiGo.

Singapore Airlines, which owns 49% of full-service carrier Vistara, will get a 25.1% stake in the merged carrier for a payment of 2,058.5 crore in cash, according to an exchange filing on Tuesday. The Tata group will own the remaining 74.9%.

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According to the agreement, Singapore Airlines’ 49% interest in Vistara will translate into approximately 20.6% of Air India after the merger. Singapore Airlines will pay cash at the time of completion of the merger to acquire an additional 4.5% stake. Under the Companies Act, a shareholder must hold more than 25% to be able to block a special resolution, which requires at least a 75% vote to pass.

Singapore Airlines has also agreed to invest up to 5,020 crore for the various plans put in place by the Tata group in FY23 and FY24 for fleet modernization, aircraft induction and other purposes related to Air India operations. The Tata group is expected to invest around 20,000 crore in the combined Air India group from now until FY24, taking the valuation of Air India, with four airlines, to nearly 36,000 crore by then, a person in the know of the matter said.

“Air India is focusing on growing both its network and fleet, revamping its customer proposition, and enhancing safety, reliability and on-time performance. We are excited with the opportunity of creating a strong Air India which would offer both full-service and low-cost service across domestic and international routes," said N. Chandrasekaran, chairman of Tata Sons.

According to October data from the Directorate General of Civil Aviation, Tata group airlines hold a 25.9% market share. IndiGo, run by InterGlobe Aviation Ltd, is the largest airline with a 56.7% stake.

Consultant CAPA India expects Air India to gain strategic expertise, industry capabilities and access to capital through the partnership with Singapore Airlines.

“The competitive dynamics in India are moving towards a two-pillar system around the Air India group and IndiGo. The two carriers combined are, in due course, expected to achieve a domestic market share of 75-80%. In the international market, they are expected to grow from 37.8% in Q2 FY23 to over 50%. This will redraw market and consumer power in the global arena back to Indian carriers, which has historically been dominated by foreign airlines," CAPA India said.

In an exchange filing, Singapore Airlines said it would fund the cash component by way of its internal cash resources and pay it in a single tranche to Air India on completion of merger.

Singapore Airlines said it has taken into account the net asset value of Air India, Vistara, capital invested to date in Air India, Air India Express, AirAsia India and Vistara, the precedent transactions in the aviation industry, including Tata Sons’ acquisition of three airlines in early 2022, as well as an assessment of the future financial and operating conditions of the merged Air India.

“With this merger, we have an opportunity to deepen our relationship with Tata and participate directly in an exciting new growth phase in India’s aviation market. We will work together to support Air India’s transformation programme, unlock its significant potential, and restore it to its position as a leading airline on the global stage," said Goh Choon Phong, chief executive of Singapore Airlines.

The biggest concern regarding the merger is that there is no clarity regarding the board of the merged entity and the distribution of roles between Singapore Airlines and the Tata group, said Mark Martin, founder and CEO of Martin Consulting. He said there is also a worry regarding the restructuring of the workforce for some roles as Singapore Airlines may want to bring in more of its people.

So far, a decision has not been taken on branding, another official said, adding that while the merged entity will be Air India, both stakeholders have time to decide on whether they want to operate two brands or keep one.

Vistara officials said it is business as usual for them for now and until the merger is completed.

The transaction for the merger will need approvals from the appropriate National Company Law Tribunal (NCLT) bench, anti-trust bodies from Singapore and India, the Reserve Bank of India, the civil aviation ministry, and shareholders and creditors of both airlines. BofA (Bank of America) Securities was the financial adviser to Tata Sons in the transaction.

The transaction is estimated to be completed by March 2024. With this consolidation, Air India will have a combined fleet of 218 aircraft, the second largest after IndiGo which has a fleet of more than 280 aircraft. This will include Air India (113 planes), AirAsia India (28 planes), Vistara (53), and Air India Express (24).

The merger of Vistara marks the final milestone in the larger consolidation strategy of the Tata Group for its airline business, creating a larger full-service platform combining Air India and Vistara.

Tata Sons, via unit, Talace Pvt. Ltd acquired Air India and Air India Express from the government. On 2 November, AirAsia Bhd exited AirAsia India, with Tata Group’s Air India acquiring the Malaysian company’s remaining stake in the airline. The Tata Group has already stated that it will merge budget carriers AirAsia India with Air India Express.

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