Update on Air India’s Disinvestment — Is Tata Getting Closer to Acquisition?
On June 28th 2017, something unprecedented happened in the history of Indian aviation that most had seen coming but hadn’t entertained its possibility for real.
The Government of India approved the process of privatising the national carrier, Air India (AI). The company had been reeling under debt to the tune of ₹33,392cr ($4.5bn) and it was time to let it go.
However, it has been over three years since and the process is yet to materialise. In the latest episode, Tata Sons has stepped into the ring as a potential bidder to acquire the debt-laden airline, which was once its very own jewelled possession.
A Recap of the Disinvestment Process
In 2018, the Government decided to sell 76% of its stake in Air India and Air India Express and a 50% stake in its joint venture with SATS (Singapore Airport Terminal Services). The process mandated that the acquirers must take on the entirety of the debt, which ultimately proved scorched earth and shooed bidders away.
So, a year later, the Government revised its approach with a 100% disinvestment agenda and this time with a somewhat improved debt profile. ₹29,464cr ($4bn) of the staggering ₹58,255cr ($7.9bn) net debt (2018–19) was parked away in a special purpose vehicle called the Air India Assets Holding Company.
To coat the candy even further, on October 29th, the Civil Aviation Ministry announced an amendment in the bidding format by switching it on the basis of equity value to enterprise value, implying greater flexibility for investors with market forces determining the value of debt (translation: more write downs for the creditors?). The highest bid would be decided upon this enterprise value and 15% cash would need to be paid upfront.
What Does the Playing Field Look Like?
5 pm yesterday was the deadline for submitting Expressions of Interest (EoIs). Based on preliminary reports, the following groups are believed to have cast their die in the arena.
Tata Sons — Tata’s tryst with Air India has been rather desolate. Although AI was conceived as the brainchild of JRD Tata in 1932, the Government was quick to nationalise it post independence.
Since then, the company has attempted time and again to get back in the aviation game, that has resulted in two businesses by the name of Air Asia and Vistara.
Both of them are joint ventures with Tata owning 51% in each (former with AirAsia Berhad and latter with Singapore Airlines). Although both businesses were hit hard by the pandemic, their performance prior to that wasn’t remarkable either. As per Centre for Aviation (CAPA) figures, Air Asia and Vistara incurred a combined loss of $845m through March this year.
The aspect in which Tata stands out is its unfailing commitment to latch on to the aviation business, perhaps due to its heritage or on account of plain old adventurism, the likes of which can be afforded by a $113bn conglomerate.
It’s JV partner, Singapore Airlines is reportedly not too keen on such adventurism that could add to its financial problems. Interestingly, the bidding process allows for inclusion of new partners even after the bidding commences which possibly gives Tata a window to bring about its partner.
In any case, if it succeeds in its bid for AI, it will gain approximately 23% market share in the domestic airline market and a possible near-monopoly over international routes operated by Indian carriers.
Interrupts Inc — This is a New-York based retirement asset fund led by chairman Laxmi Prasad who is one of the few having publicly declared his intent to acquire AI. He is aiming for a 49% stake in the acquisition with an open invitation to the AI employees to participate in the bidding process in order to acquire the remaining 51% in his proposed venture.
Although the group hasn’t been very vocal about their plans for the acquisition, if and once they succeed, they intend to move AI’s operating assets into an InvIT and then subsequently monetise these assets.
Reportedly, 219 employees, including a few Board members have enlisted themselves as part of this consortium, as of now.
Air India Employees Group — The idea and movement to encourage employees’ participation in the disinvestment process was first triggered by AI’s commercial director Meenakshi Malik who penned an open letter to about 20,000 staff members urging them to step forward because she believes that employees are the best suited to run the airline.
Over 200 employees of AI have joined in so far, each by pooling a minimum of ₹1L ($1,358) of their own money into this momentous consortium which claims to enjoy the backing of a Seychelles-based investor.
Prospects From Here
Last month, Air India’s domestic market share (in terms of passengers carried) dropped to single digits (9.1%). The pandemic has brought the aviation industry to its knees (provoking enough despondency to induce the likes of Berkshire Hathaway to sell ALL of its airline stocks!)
DGCA data reports a 55% decline in air travel since lockdowns went into effect. With every passing day of stressed cash flow generation, the pressure from debt continues to climb. The next development is scheduled for January 5th when qualifying bidders are notified of their eligibility to decide who is going to be the one to put the Maharaja in their corner.
(Originally published December 16th 2020 in transfin.in)
