Kingfisher Airlines is now in discussions with international airline companies to divest 25% stake to raise funds. Virgin Airlines, Singapore Airlines and British Airways are said to be the key contenders according to an Economic Times report. This marks a change in strategy for Vijay Mallya, the promoter of UB Group which owns Kingfisher Airlines.

He was earlier looking to raise funds from private equity firms and had reportedly even signed a term sheet. But a strategic investor is expected to fetch better valuation compared to PE firms and so that PE deal is now being seen as dead.

The only problem is foreign airlines are not allowed to invest in Indian airlines as of now. While foreign airlines are not allowed to pick up equity in aviation companies, other institutions and foreign investors are allowed to hold up to 49% stake.

But, the government is reportedly planning a policy change to allow upto 26% investment by foreign airlines in domestic carriers. With Mallya's political connections, this could well happen soon enough to allow a deal for Kingfisher Airlines.

Kingfisher has been looking at a valuation of $1 billion plus. But the company's current valuation rules out such a premium valuation. Kingfisher Airlines has a market cap around Rs 700 crore(~140 miilion). At this valuation, a 25% dilution would translate into a deal worth Rs 175 crore for the struggling airline. But a strategic investor will surely bring in a premium to get hold of a sizeable chunk of an airlines which holds around one third market share of Indian domestic air traffic.

Most Indian carriers are already sitting on significant debt and raising anymore may not be easy in the prevailing conditions. Indian aviation companies have been hit by the global financial meltdown, high oil prices and over capacity in many routes.

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