The Naresh Goyal-promoted Jet Airways on Wednesday became the first Indian airline to sell a stake to a foreign carrier since last years relaxation in foreign direct investment rules. The companys board approved a decision to allot 2.73 crore shares on a preferential basis to Abu Dhabis Etihad Airways for around R2,060 crore ($379 million). It was in September 2012 that the government allowed foreign carriers to buy up to 49% in Indian airlines.
Earlier, a proposal to start a new airline by Malaysias AirAsia and the Tata Group was cleared by the Foreign Investment Promotion Board.
The deal values Jet at nearly R8,500 crore, which is nearly double its market capitalisation of R4,954 crore as per Tuesdays closing price. After the allotment, Etihad will hold a 24% stake in Jet while promoters will continue to hold 60.80% stake. Shares will be allotted at R754.73 each, a 31% premium to Tuesdays closing price of R573.85 on the BSE.
Etihad wider overall commitment to Jet Airways includes the injection of a further $220 million, which includes $70 million paid to purchase Jet Airways three pairs of Heathrow slots through the sale and leaseback agreement announced in February 2013. The remaining $150 million will be invested by Etihad to take a majority equity investment in Jet Airways frequent flyer programme, Jet Privilege. Jet Airways had already spun off the frequent flyer programme into a separate wholly-owned company named Jet Privilege. Etihads purchase of Jet Privilege is expected to be complete in the next six months.
Etihad has also given a commitment of $600 million of low-interest loans to Jet from its bankers, which will help reduce the existing high-cost debt on Jets books.
This transaction further strengthens the balance sheet of Jet and, more importantly, underpins future revenue streams, which will accelerate our return to sustainable profitability and liquidity, Goyal said in a statement.
The Indian market is fundamental to our business model of organic growth partnerships and equity investments. This deal will allow us to compete more effectively in one of the largest and fastest-growing markets in the world, said Etihads chief executive officer James Hogan.
The airlines will also explore joint purchasing opportunities for fuel, spare parts, equipment and catering supplies, as well as external services such as insurance and technology support, the two airlines stated.
As Etihad will pick up only 24%, there would be no need for an open offer, although sources said Jets promoters may further reduce holding through an offer for sale. Sources added that Etihad may get two seats on Jets board of directors.
The announcement concluded nearly five months of negotiations. Jet was advised by DSP Merrill Lynch, Credit Suisse and Ernst & Young on the transaction while Etihad was advised by HSBC and PricewaterhouseCoopers.
Its a game-changing opportunity for Etihad and a game-changing opportunity for India, said Kapil Kaul, regional head for aviation consultancy firm Centre for Asia Pacific Aviation. Kaul added that besides cash, Jet would also benefit from strategic expertise, cheap financing and possible fuel import benefits.
As on December 31, 2012, Jet had a consolidated debt of Rs 11,900 crore or $2.16 billion. In the nine months from April to December 2012, it had a net profit of Rs 16.81 crore on net revenues of Rs 12,930 crore. In the corresponding period last year, the airline made a loss of Rs 971.61 crore on net revenues of Rs 10,744 crore. The carrier reported a net loss of Rs 1,236.10 crore in 2011-12 fiscal on revenues of Rs 14,815.91 crore. It is yet to announce the 2012-13 fiscal results.
Things are definitely positive for Jet, said Sharan Lillaney, an aviation analyst at Mumbai-based Angel Broking. It can reduce its debt or utilise the money for further expansion. It will also benefit from Etihads expertise on international routes; so its a definite positive for Jet.
This will become the base for valuing all domestic airline companies. SpiceJet, IndiGo and GoAir will all attract similar valuations if somebody is interested in them, Kaul added.
Sun Groups chief financial officer SL Narayanan said this could fast-track other deals in the aviation industry. He did not comment on whether group company SpiceJet would conclude any deal this fiscal.
The announcement closely follows Jet asking the government to increase seat entitlements to Abu Dhabi by 54,000 seats a week, out of which 42,000 will be utilised by Jet alone. If the aviation ministry clears the proposal, Etihad will also have the option to utilise 54,000 seats a week to India.
Jet is expected to shift a third of its operations to Abu Dhabi after the deal. However, former executive director Saroj Datta said he expects the airline to continue operating out of Brussels. I feel they would still need a base in Brussels, said Datta. But this deal would help Jet expand its European operations.
Etihad Airways, which began operations in 2003, serves 86 cities in West Asia, Africa, Australia, Asia, Europe and North America, with a fleet of 70 Airbus and Boeing aircraft. It also has at least 90 aircraft on firm order, including 10 Airbus A380s, the worlds largest passenger aircraft. Jet Airways currently operates a fleet of 100 aircraft and flies to 73 destinations in India and at least 20 overseas, 10 of these international destinations are in West Asia.
Incidentally, Jet was the first airline in India to have investment from foreign carriers. In 1993, Kuwait Airways and Gulf Air bought 20% each in Tail Winds, an overseas corporate body owned by Naresh Goyal, which held all of Jet Airways stock. In April 1997, the government ordered Jet to conform to the rule that overseas airlines should not hold stock in India carriers, following which Goyal acquired the 40%.
Jets change in stance towards foreign direct investment in aviation was first indicated after the airlines annual general meeting in 2012. Goyal had said at the time that he was open to the idea of selling stake to foreign carriers if the rules changed. Subsequently in September 2012, the government allowed foreign carriers to pick up 49% stake in Indian carriers.
* Jet to allot 2.73-cr shares to Etihad Airways at a price of R754.73 each; deal values Jet Airways at around R8,500 cr
* Allotment price is at 31% premium to Jet Airways closing price of R573.85 on Tuesday
* Post allotment, Etihad Airways will hold 24% stake; no open offer required
* Jet Airways promoters will retain 60.80% shareholding post allotment to Etihad