Abu Dhabi-based Etihad has completed the deal to buy 24 per cent in Jet Airways through a preferential allotment and appointed two nominees on the board of the India’s second largest carrier by passengers, making Jet the first operational Indian airlines with strategic investment by a foreign carrier.
This follows an approval from the Competition Commission of India (CCI) last week which gave the final ground clearance, around seven months after the two sides announced a deal early this year.
Jet Airways has issued 27.2 million shares at a price of Rs 754.73 each aggregating to Rs 2057.66 crore ($329.5 million). The deal was struck at a sharp premium to the market price then and over twice the share price now.
Jet Airways scrip was up 1.62 per cent to close at Rs 325.75 a share on the BSE in a weak Mumbai market on Wednesday.
As part of the deal, James Hogan, president & CEO of Etihad Airways and James Rigney, CFO of the Abu Dhabi-based airlines are joining the board of Jet. Simultaneously, one of the independent directors Victoriano P. Dungca has resigned from the board.
Till now Jet had a seven member board of which five directors were independent. With the new development, the airlines will have an eight member board of which four are independent directors, two nominees of Etihad besides an executive director of Jet Airways and promoter Naresh Goyal himself as a non-executive chairman.
This, in effect, means Goyal and Etihad will have equal say on the board decisions despite holding less than half the stake.
VCCircle, which had first broken the news of Etihad’s impending deal with Jet, had hinted at such a possibility.
The completion of the preferential allotment also shrinks the quantum of stake held by Goyal to 51 per cent. Early this week, he sold 7.9 per cent stake held in the company through an overseas holding arm for $34 million.
The deal makes it the first such stake acquisition by a foreign airlines after the Indian government opened up the aviation sector in September last year, allowing foreign carriers to pick up as much as 49 per cent stake in domestic airlines.
The deal marks a head-start for the duo as against the impending competition from the proposed joint venture between Tata Group and Singapore Airlines to open a new Indian carrier. Although existing rules bar new airlines from operating in the international circuit, the new airlines from Tata-Singapore Airlines is expected to give competition to Jet-Etihad in the future.
This deal will enable Etihad to expand its presence into more cities in India besides getting a chunk of traffic with code sharing. Conversely, it provides Jet with access to a wider international network.
As per the agreement, Jet Airways would also use Abu Dhabi as its hub for services to and from ‘exclusive territories” ( Africa, North and South America excluding Canada and the UAE). Consequently Jet has also agreed to timely transition of all its current services to and from Dubai and Sharjah to Abu Dhabi when the same becomes economically viable.
Also, Jet Airways will refrain from entering into any code share agreements with other airlines which would result in bypassing Abu Dhabi.
Jet Airways’ board has also approved the sale of the Jet Privilege Frequent Flyer Programme business of the company to its subsidiary, Jet Privilege Private Limited as a going concern on a slump sale basis. As previously announced, Etihad Airways is picking 50.1 per cent in Jet Privilege for $150 million.
Deal at a premium but Etihad saves moolah
While Etihad has paid a major premium to the market price of Jet Airways hoping to get a major leg up over its close rival Emirates in catching a chunk of overseas traffic from India, it has a good reason to cheer, thanks to India’s regulatory structure which delayed the completion of the transaction.
It has saved approximately $50 million due to the sharp depreciation of the Indian currency since the time it announced the deal. When the deal was struck in April, the deal value represented around $379 million which has now shrunk by 13 per cent. It could have snipped the deal value by almost a fifth if the transaction was completed a couple of months ago when Indian currency hit a historic low.