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Etihad will pick 24% in Jet for $375M, may have more board nominees than Naresh Goyal

Separately, Jet promoter Naresh Goyal will also sell stake worth around $160 million by June.

Etihad Airways of the UAE is close to sewing a two-tiered deal to buy 24 per cent stake in Jet Airways, India’s second largest carrier, in a deal expected to be worth Rs 2,000 crore ($375 million), according to sources. This will be the first such stake acquisition by a foreign airline after the Indian government opened up the aviation sector in September, allowing foreign carriers to pick as much as 49 per cent stake in domestic airlines.

The deal has been in the works for the past two months, but the final contours have become clear now as the terms of the agreement is set to be frozen by this weekend.

While VCCircle had first reported that the deal is being negotiated at Rs 800 a share, the final figure is likely to be around Rs 750 a piece. This would mean cash infusion of around Rs 2,000 crore through a preferential allotment. The deal will put a post money valuation of around $1.6 billion for Jet.

This would be at a premium of around 26 per cent to the market price. Jet Airways scrip closed at Rs 596 on the BSE in a flat Mumbai market on Wednesday.

Sources said Etihad does not want to increase its stake in the immediate future and 24 per cent stake buy will not trigger the mandatory open offer for a listed firm.

An independent source who spoke to VCCircle in condition of anonymity added, “The deal is expected to be signed this Friday but may not be formally announced. They are expecting the FIPB approval to come in next 9-10 days and they may announce post that.”

The source said Etihad has managed to get itself as many as five board seats as compared to the initially promised two. This may mean Etihad having more directors on board than Jet promoter Naresh Goyal’s team.

At present, Jet has a seven-member board of which five are independent. Since, at least half of the board needs to be independent, the board size would need to almost double.

Post the fresh allotment, Goyal’s stake is likely to come down to around 61 per cent from 80 per cent currently. He will sell around 10 per cent of this by June 2013 to bring total promoter holding to 75 per cent (including Etihad’s 24 per cent stake).

Sources indicate that Naresh Goyal is looking to sell his shares at close to Rs 800 per share. At this price he would be able to encash around Rs 900 crore or around $160 million. It could not be immediately ascertained through which route would this be implemented -- a share sale in market or through a direct stake purchase by a financial investor.

Credit Suisse and Bank of America Merrill Lynch are the advisors to the transaction.

Early this month, Jet Airways had disclosed it was in talks with Etihad Airways, but had added that no terms have been finalised as yet.

Etihad spokesperson had previously replied in an e-mail to VCCircle: “The Indian aviation industry offers tremendous potential, with significant passenger movement on domestic and international sectors. Etihad Airways has identified equity investments in other airlines as an important evolution of its successful partnership strategy. Such investments will be made where Etihad Airways believes the commercial prospects are strong, where there are like-minded business philosophies, and where such commitment will be welcomed. If or when we do make further investments of this sort, we will announce them in line with regulatory and commercial requirements."

The final structuring of the deal would be interesting as the Indian airlines was previously granted special permission to maintain foreign ownership beyond the FDI ceiling. Naresh Goyal owns the stake in the airlines through a foreign incorporated entity.

A deal with Etihad will mean foreign incorporated entities will continue to own majority stake in the firm beyond the 49 per cent sectoral FDI cap.

Debt recast & strategic alliance

The money raised from this transaction will be used to retire debt and the deal will help Jet retire $500 million of its expensive loan with cheaper borrowing cost. At present, Jet Airways is paying close to 14-15 per cent interest on its loans, which will effectively halve after Etihad deal.

In an earlier conference call, Jet Airways management had indicated that it had plans to more than double its repayments to its lenders. It plans to pay $600 million by March 2013 to its lenders.
The company had a total debt of over $2 billion as of September 2012, with around Rs 322 crore in interest payment during the second quarter.

The deal will also mean Jet’s international hub at Brussels would shift to the Abu Dhabi, which will operationally help Jet cut its fuel costs besides expanding its network.

At a strategic level, the deal would mean a big fillip to Jet Airways for its overseas routes, with code-sharing alliance. And for Etihad, it will be a leg up to cater to travelers between India and the UAE. Abu Dhabi-based Etihad is a small player in the Indian market while Dubai-based Emirates is a giant.

At present, Emirates dominates the India-UAE route and as per reports, accounts for around one-fifth of all outbound traffic from India, with close to 200 flights a week.

Etihad had been trying to build its international presence in the recent past. It acquired strategic but minority equity stakes in Air Seychelles, Virgin Australia and Air Berlin.

For the three months ended September 30, 2012, Jet Airways drew some 60 per cent of its Rs 4,100 crore revenues from international routes although its margins in the domestic route were marginally higher.

Jet Airways had revenues of Rs 16,703 crore with net loss of Rs 1,420 crore for the year ended March 2012.

(Edited by Prem Udayabhanu)

Etihad Airways P.J.S.C. is an airline company. It offers domestic and international air transportation services. The firm also provides booking services for car, chauffeurs and stopovers etc. The company was founded in 2003 and is based in Abu Dhabi, United Arab Emirates.