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News Analysis: SpiceJet Turns Most Wanted Airline

18 August, 2008

Global financial services firm Goldman Sachs has joined the race to pick a stake in Delhi-based low cost carrier SpiceJet. This is even as SpiceJet is continuing its negotiations with distressed assets fund manager Wilbur Ross and Vijay Mallya’s Kingfisher Airlines. A deal is expected by end of the month.

A Business Standard report, quoting some SpiceJet sources, said that the airlines might also approach domestic equity funds to raise capital for the company. A clearer picture is likely to emerge over the next 10 days. The firm’s CEO Siddhant Sharma said, “A merger or a standalone funding or a combination of both is still very much on the cards.” SpiceJet, which has over 10 per cent market share in the domestic aviation market, is eyeing an investment of at least $100 million, to stay afloat and to fund fleet expansion.

For foreign investors such as Wilbur Ross and Goldman Sachs, which holds convertible bonds in the airline, the existing foreign direct investment (FDI) limit of 49 per cent in civil aviation could be a stumbling block. As of now, SpiceJet has foreign holdings of 38.35 per cent, which doesn’t leave much scope for Wilbur Ross or Goldman Sachs to acquire a big stake.

Now there are two possibilities: the promoters sell their stake which triggers an open offer and so on (looks unlikely as the promoters have been quoted as saying that they are not looking to completely exit) and the other option is where new investor gets additional share/convertibles which give them a large stake.

 

Foriegn Hand

One thing is clear that any foreign investor cannot be issued more than 17 per cent stake through new shares. Here’s how: a 20 per cent stake dilution would bring down the value of existing foreign holding to around 32 per cent and add to it the equity stake of around 17 per cent that the new investor gets of the ‘post issue’ capital. However this could create a problem as it would then trigger an open offer (as Sebi norms mandates an offer if stake crosses 15 per cent in a listed firm) but the acquirer cannot acquire more shares as it would hit the FDI ceiling.

Currently, Dubai’s investment firm, Istithmar (part of a sovereign wealth fund) holds over 13.4 per cent and the promoter shareholder London-based Bhupendra Kansagra has 12.91 per cent.

This is one reason why SpiceJet-appointed merchant bankers Rothschild may be pursuing talks with domestic investors since they will be outside the purview of the FDI limit.

Among others who could emerge as an eventual owner of SpiceJet is Anil Ambani-led ADAG which has been keen on entering the airline sector and had even tried to acquire Air Deccan last year which was later snapped by Kingfisher.

It’s also said that Vijay Mallya’s Kingfisher could be interested in acquiring a stake in SpiceJet. For Kingfisher, this could be the final possible deal to become the largest player in Indian aviation sector. Both Kingfisher-Deccan and Jet-Jetlite combine have close to 30 per cent market share.

With SpiceJet having around 10 per cent share if one of the two groups buys the carrier it would have about 40 per cent share which could give it a pricing power.

This is also important as the new competition commission could put spokes in such deals in the future. This is because such deals where the acquirer could get a large market share of a particular segment would come under heavy scrutiny of the competition commission.

VCCircle learns that some large corporate groups have been delaying the implementation of the commission rules so that they can complete some of the key acquisitions they want to do as part of the future strategic control.

 


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News Analysis: SpiceJet Turns Most Wanted Airline

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