Jet Airways confirmed on Thursday it was in talks with Abu Dhabi-based Etihad Airways for a potential stake sale though terms have not been finalised. “Various structures are being explored by the legal and commercial teams and care is being taken to ensure that all regulatory requirements are fully complied with,” the airline said in a filing to the BSE.
“By its very nature, there cannot, at this stage, be a firm time line as to the progress of these negotiations, considering the complexity of transnational transactions such as this, and the complexity of the legal requirements of the regulatory structure,” the company said.
Etihad is expected to pick up a 24% stake in Jet for around R1,600-1,800 crore, valuing the carrier at about R6,259-7,511 crore. Jet’s market capitalisation as per Thursday’s share price is R5,242 crore. The scrip has risen 65% since the government relaxed rules on FDI in Indian carriers. The airline reported a net loss of R1,236.10 crore in 2011-12 on revenues of R14,815.91 crore.
“From Jet Airways’ perspective, the most significant advantage from a potential deal will be more equity and access to loan funds. The main benefit to Etihad could probably largely be from better traffic feed from India into Abu Dhabi,” a recent HSBC report noted.
Etihad Airways is the national airline of the United Arab Emirates fully owned by the Abu Dhabi government. After starting commercial operations in November 2003, it has gained a fleet strength of 67 aircraft (a mix of Airbus, Boeing, narrow-body and wide-body aircraft including six dedicated freighters) and plans to grow to 158 aircraft by 2020. The HSBC report noted that a key feature of Etihad’s strategy so far has been its strategic partnerships and code shares with airlines all over the world.
Jet and Etihad already have a code-sharing agreement, and a tie-up could see Jet emerging as more formidable rival to Air India, while Etihad would be able to offer greater competition to Dubai-based Emirates, which carries a big slice of traffic between India and the Middle East.
Jet losses have eroded its shareholders’ equity and the net debt as at the end of September 2012 was close to Rs 8,900 crore for the standalone entity; the group’s balance sheet debt is approximately Rs 12,000 crore. The group’s annualised interest expenses based on first half of 2012-13 are estimated at Rs 1,200 crore. Analysts point out the group is heavily leveraged and that the interest bill is rising due to the rising risk aversion of banks towards the aviation sector. Moreover, the depreciating rupee has resulted in a rise in interest costs on dollar-denominated loans. On a rough reckoning, an equity infusion of Rs 1,600 crore will lower Jet’s FY14E net debt to Ebitda from 6 times to 5 times and increase the interest coverage ratio from 1.8 times to 2.1 times, analysts estimate.
A civil aviation ministry official had said on Wednesday that for the consummation of the deal, Jet would have to restructure its shareholding pattern. Currently, promoter-chairman Naresh Goyal holds his 80% stake in the airline through an overseas corporate body (OCB), Tail Winds Ltd, registered in the tax haven of Isle of Man. The airline would need to convert its Tail Winds ownership to London-based non-resident Indian Naresh Goyal’s name and would need FIPB approval for the same. The change in ownership structure would be required as Indian laws allow only 49% foreign investment in airlines and 100% investment by NRIs. Tail Winds is considered to be a foreign investment as the Reserve Bank of India has ended the concept of OCBs and considers such investments to be foreign investments.
If Etihad and Jet agree to a 24% stake sale, it would not trigger the takeover code which say that a company acquiring 25% and above in another listed firm, needs to make an open offer for another 26% of the equity. Since foreign investment in aviation is capped at 49% and such a provision could potentially result in the limit being breached, the government had said the investors would need to apply to the regulator for an exemption.
* Etihad is expected to pick up a 24% stake in Jet for around R1,600-1,800 crore
* Jet’s market capitalisation as per Thursday’s share price is R5,242 crore
* More equity, access to loan for Jet Airways; greater traffic from India for Etihad
* Jet-Etihad tie-up could see Jet emerging as more formidable rival to Air India