Etihad to buy 24% of Jet Airways for $379M

Naresh Goyal-led Jet Airways has inked a deal to sell 24 per cent stake in the country’s second largest carrier to Abu Dhabi-based Etihad Airways through a preferential allotment for $379 million.

As per the terms of the agreement, Etihad will pick up 27.2 million shares at a price of not less than Rs 754.7 a unit, translating to a deal worth Rs 2,057 crore ($379 million), Jet Airways has disclosed on Wednesday. It will acquire 24 per cent of the expanded capital base.

Simultaneously, Etihad is also putting $150 million to buy a majority stake in Jet Privilege, the frequent flier programme of the airlines. This is expected to be completed in the next six months. Two months ago, Jet Airways divested its three parking slots at London’s Heathrow Airport to Etihad Airways for $70 million (Rs 380 crore), in what was seen as a first leg of the larger, impending deal. This takes the total commitment by Etihad in Jet Airways at around $600 million.

VCCircle had first reported in November 2012 that Etihad was close to acquiring 24 per cent in Jet Airways. In a separate report in January this year, we said that the deal value could be around Rs 750 a share.

Jet Airways scrip had shot up 4.4 per cent to close at Rs 573.85 a share on the BSE in a flat Mumbai market on Tuesday. The announcement was made on Wednesday, when the stock markets were closed for trading.

This means the deal has been struck at over 31 per cent premium to the last-traded market price. The deal values Jet Airways at $1.58 billion.

SpiceJet, another public-listed carrier, currently has a market cap of $275 million. The budget carrier was one fourth the size of Jet Airways in revenues during FY12. Both firms clocked negative EBITDA for FY12, but have seen a marked improvement in profitability in the third quarter ended December 31, 2012, aided by lower aviation fuel prices and firm airfares.

Post the equity dilution, Goyal will hold 60.8 per cent stake in the company. This may not be enough to enable him to meet the public listing norms, which put a ceiling of 75 per cent on the maximum stake to be held by promoters. Goyal currently holds around 80 per cent in Jet Airways. The minimum public holdings norms are to be met by June 30, 2013.

Another issue will be the classification of Etihad. If it is considered as a co-promoter, the total promoter holding will actually move up to around 85 per cent.

Sources had previously told VCCircle post the fresh allotment, Goyal would sell around 10 per cent by June 2013 to bring total promoter holding to 75 per cent (including Etihad’s 24 per cent stake).

VCCircle had learnt that Goyal is looking to sell his shares at close to Rs 800 per share. At this price, he will be able to encash around Rs 900 crore or around $160 million. But the mode to achieve the same can’t be immediately ascertained – it can be a share sale in the market or a direct stake purchase by a financial investor.

What could be tricky, though, is the mandatory approvals for the deal. 

Since Etihad is not acquiring over 25 per cent of the firm, it would not be asked to come with a mandatory open offer. Sources had earlier told VCCircle Etihad would not want to increase its stake in the immediate future and 24 per cent stake buy would not trigger the mandatory open offer for a listed firm.

Although this will ease the execution time, the deal still needs to go through other regulatory approvals from the aviation authorities.

Either way, 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 up as much as 49 per cent stake in domestic airlines. In a similar development, Malaysian budget carrier has formed a three-party joint venture, which includes the Tata Group, to enter the domestic aviation business in India. However, that’s a greenfield venture.

The Jet-Etihad deal has been in the works for the past 7-8 months. Earlier this year, Jet Airways disclosed it was in talks with Etihad Airways, but added that no terms had been finalised. 

The final structuring of the deal will be interesting as the Indian carrier was previously granted special permission to maintain foreign ownership beyond the FDI ceiling. Naresh Goyal owns the stake in the airline 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 sectoral FDI cap of 49 per cent. 

Debt recast & strategic alliance

The money raised from this transaction will be used to retire debt. The deal will help Jet retire $500 million of its expensive loan with cheaper borrowing cost. 

In an earlier conference call, Jet Airways management indicated that it planned to more than double its repayments to its lenders. The carrier had 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 also means Jet’s international hub at Brussels will be shifted to Abu Dhabi, which will help Jet cut its fuel costs besides expanding its network. 

James Hogan, president & CEO of Etihad Airways, said: “It (the deal) is expected to bring immediate revenue growth and cost synergy opportunities, with our initial estimates of a contribution of several hundred million dollars for both airlines over the next five years.”

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

The combined entity would provide connections to some 140 destinations including 23 Indian cities. It would use Mumbai and Delhi as domestic hubs.

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. 

Earlier, too, Etihad tried to build its international presence as it acquired strategic but minority equity stakes in Air Seychelles, Virgin Australia and Air Berlin. 

For the three months ended December 31, 2012, Jet Airways drew a little over half of its Rs 4,200 crore revenues from international routes although its margins in the domestic route were slightly higher.

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

Etihad is being advised by  HSBC, DLA Piper, Amarchand & Mangaldas & Suresh A. Shroff & Co and PricewaterhouseCoopers on this transaction. Jet Airways is being advised by Harish Salve, Gagrats, ELP, E&Y, DSP Merrill Lynch and Credit Suisse.

(Edited by Sanghamitra Mandal)

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