Air India divestment: A small turbulence as Rothschild refuses to match EY’s fee

It’s a long flight for the government’s ambitious plan to sell strategic stake in Air India and it has already flown into a turbulence, albeit a minor one that it would want to put behind soon. It had to select two transaction advisors to advise it on the process but Rothschild, one of the two who were about to get the mandate, has decided against matching the price quoted by EY, the lowest bidder, according to two sources familiar with the development.

It is not certain yet if the government will go with only EY or initiate a new selection process.

The request for proposal, floated by finance ministry’s department of investment and public asset management, states that it will select up to two advisors to advise it on the sale of the state-owned airline. Thus, nothing stops the department from handing EY the entire mandate, assuming the accounting firm is willing to undertake the exercise alone for the price quoted by it.

Incidentally in this case, the government does not have the option of offering the third lowest bidder the option to match the lowest bid as only three financial bids were invited after the presentations to give quotes and KPMG, the third bidder, saw its quote disqualified as it quoted a minimum price for its services, one of the sources said. Bidding norms did not permit quoting of a minimum price.

The fee to be paid to the transaction advisors will be a percentage of the disinvestment proceeds reduced by the debt that will be transferred to a special purpose vehicle before the divestment. The fee will be split equally between the advisors. A special purpose vehicle will also be formed in which all the real estate and artefacts of the airline will be housed, according to a ministry official.

Besides transaction advisor(s), there are at least two other kinds of consultants/advisors that the department of investment and public asset management seeks to engage to help it with the sale of the loss-making airline. One is the legal advisor and the other is the asset valuer.

Cyril Amarchand Mangaldas is the legal advisor while the name of the asset valuer isn’t yet known.

Sale of monolith lime Air India will not be an easy exercise for various reasons. The scale of the airline’s operations is huge and it will not be an easy exercise to value its assets like buildings and real estate lying in various cities. The airline’s unions – at least seven of them – are all very strong and, like all unions, enjoy political patronage. The exercise also marks this government’s first strategic divestment in a public sector company and that too as large as this.

Air India made a loss of Rs. 4,310.65 crore in 2015-16. This was on top of a loss of Rs. 6,280.42 crore in 2014-15. The company is weighed down by a debt of around Rs. 50,000 crore.

The government’s rules on foreign direct investment permit 100 per cent FDI in an airline with a foreign airline not allowed to hold more than 49 percent in an Indian carrier.

While the final contours of the divestment will be known only after all the stakeholders – the government, transaction advisor, legal advisor, and asset valuer and interested suitors deliberate on buying the whole or parts of the airline – it is certain that the government will have to absorb AI’s debt to have any private sector company acquire the loss-making airline.

While the government intends to complete the divestment of the airline this financial year itself, it will not be a smooth going. The airline’s unions, seven of them, are expected to meet in the capital this week to draw out a strategy for opposing the privatization process.