Given the fresh uncertainties caused by Covid-19, an inter-ministerial group (IMG) on Air India privatisation plan has favoured allowing bids for the loss-making carrier on the basis of its enterprise value, sans any pre-determined level of ‘sustainable debt’ for the potential bidders to reckon with.
Under the current plan, the buyer is required to take over the airline’s estimated residual debt of Rs 23,286 crore.
EY, the transaction adviser (TA), in a presentation to the IMG, said the winning bidder may have the leeway to cut its workforce immediately after the acquisition – the current expression of interest (EoI) provides for a one-year job protection for the state-owned airline’s over 9,600-strong permanent workforce. Also, the adviser sought removal of the Rs 1,000-crore cap on asset sale in the first year post-acquisition of AI by the buyer.
On the both these suggestions, the IMG, according to a note circulated within the government and reviewed by FE, holds the view that a decision could be taken during the actual signing of share purchase agreement (SPA) or at the request for proposal (RFP) stage.
The current EoI was prepared in January. With Covid-19 hitting the aviation sector hard, Air India has estimated that its cash losses would climb 80% on year to Rs 6,000 crore in FY21.
Keeping in view the prevailing situation in the domestic and international aviation industry and a worsening of AI’s performance, the TA has presented four options to the IMG for AI’s strategic disinvestment.
Under the Option 1, no change in its debt level (residual debt to remain Rs 23,286 crore) will be allowed and only extension of timeline be given for bidders to submit the EoIs. Alternatively, it said, the debt level may be cut to Rs 17,464 crore, with associated changes in timelines but without additional changes in bidding construct.
Under Option 2, which the IMG favours – there won’t be a pre-fixed debt level; bidders can quote combined debt plus equity value (enterprise value) with associated changes in timelines and employee-related flexibilities mentioned above.
The third option mooted is that the government would continue to run AI for 2 years without privatisation, which could cost the exchequer Rs 15,435 crore. The fourth option is to close down the national carrier, which would entail that the exchequer absorb all debt and loss of jobs for all employees.
The core group of secretaries on disinvestment and the ministerial panel on AI disinvestment would take a final decision in this regard.
The Centre had floated EoI and preliminary information memorandum (PIM) on January 27 and EOI was sought by March 17 (extended to October 30 and may further be extended by up to 60 days with likely modified bidding conditions).
Along with AI, the government is also offloading its 100% stake in its low-cost subsidiary, Air India Express (AIXL) and 50% of AISATS, which provides cargo and ground handling services at major Indian airports. The debt of AI and its low-cost subsidiary is being reduced by the government to around Rs 23,286 crore (to be taken over by potential buyer) from Rs 60,000 crore as on March 31, 2019. Additionally, the national carrier and its subsidiary have liabilities worth Rs 25,000 crore. Of this, the buyer would have to take over only Rs 9,700 crore liabilities backed by assets.
Buttressing its case for EV-based bidding, TA said “(this) allows for market discovery of value based on real assumptions, as the process is not anchored to a ‘debt level’ that can be misconstrued as an indicative bid price. Such bidding method has some precedents (NCLT/IBC transactions follow similar construct)”.
Some of Dipam (department of investment and public asset management) disinvestment process (disinvestment of steel plants of SAIL being conducted on a debt free basis) appear to have followed similar bidding pattern, it added.
“Such an approach would continue to have certain checks and balances in respect of GOI’s interest in form of reserve prices,” it added.
The TA has observed that with each passing year AI is becoming less attractive as its domestic market share is shrinking and other airlines are expanding their footprint in international operations (the core strength of AI).