Bad economics behind souring merger plan
IT IS not official yet but Indian civil aviation's biggest takeover deal may not happen after all. Investment banking sources say the proposed acquisition of Air Sahara by Jet Airways for $500 million (Rs 2,300 crore) could be off.
Jet Airways spokesperson Nandini Verma declined to confirm or deny it on Monday, saying: "Approvals for security clearance are still awaited." The deadline for security clearance is on June 22. Air Sahara executive director Saroj Datta said, "I've nothing to say. We are 48 hours from closure."
Aviation industry sources said Jet Airways is rethinking the deal after its due-diligence revealed some startling facts. Jet, which was allowed to do the due-diligence only after the MoU was signed, found that Air Sahara had been posting mounting losses.
The sources said Air Sahara had made losses to the tune of Rs 226 crore till January 18. Between January and March, it suffered a loss of around Rs 160 crore. "This was an eye-opener for Jet Airways. Jet did not want to absorb losses to the tune of Rs 100 crore every month after pumping in a whopping Rs 2,300 crore to acquire the airline," said a source.
But even if it cancels the deal, Jet stands to lose money -- Rs 100 crore already paid to Air Sahara. The amount, given upfront after signing the initial agreement, was paid without any guarantees.
Also, Jet paid an advance of Rs 500 crore against guarantees in March. Sahara will have to return this amount if the deal falls.
"The deal didn't make sense for Jet. It was over-priced and Jet would have got nothing out of it. It didn't have a brand and all the aircraft were leased. It has lost market share (down to 8 per cent from 10) and integration is a huge issue with pilots and engineers leaving all the time," said a CEO of a low-cost carrier.
The trigger could have been the delay in getting security clearance for Naresh Goyal to be on the board of Air Sahara. Airlines need to get the members of their board cleared by the home ministry. With the US probing the antecedents of the airline, the government is going slow on clearing Goyal, said sources. However, the real reason for Goyal backing out of the deal may have a lot to do with valuations going haywire, sources said.
Merchant bankers said Goyal expected the stock price to go up from Rs 1,150 to Rs 1,450 when the deal was announced in January and hoped to make a foreign currency convertible bond (FCCB) issue at 30 per cent premium.
The stock price did not move up as the market thought Jet had paid a higher price. And with the stock taking a hit in the recent slide, Jet's calculations seemed to have gone wrong. Jet, which was hoping to go ahead with its FCCB issue even when the stock was trading at Rs 950-1000 levels, has now deferred it.
Jet was planning to raise $800 million to fund Sahara and acquire new aircraft. ''The Jet scrip is trading at Rs 661, down 42 per cent since January 19, when Jet signed the Sahara deal. The valuation would have been based on comparitive valuation. If they agreed to pay $500 million, they should pay 42 per cent less now," said an analyst with an equity research firm.
Another obstacle for the deal could have been the "poor condition" of Air Sahara's aircraft. Jet's due-diligence showed Sahara's aircraft were in bad shape. Jet is also understood to be unhappy with the policies and operating procedures of Air Sahara. "There're lots of hidden losses in Sahara. The airline was believed to be losing Rs 60-100 crore a month," said a Delhi-based airline executive.
The other issue is the steady depletion of Sahara's other big asset -- its pilots and engineers, who have been steadily departing the airline.