Now that the dust has settled over the government picking the Tata Group as the winning suitor for loss-making state carrier Air India , we decided to speak to people who were familiar with the contours of this complex transaction.
They spoke to Moneycontrol on the condition of anonymity. Below is an insider’s account on the most high-profile disinvestment deal under the Narendra Modi regime, break down the financial contours and answer a few critical questions.
SALE OF THE MAHARAJA: WHAT WERE THE TURNING POINTS?
The government was earlier uncomfortable with handing over full ownership of Air India to the chosen bidder. Therefore , initially the stake on offer was 76 percent. This stance didn’t impress interested parties in India Inc and the first round of bidding was a damp squib.
What happened next? Well, the powers that be got into a huddle and finally decided to part with a 100 percent stake in Air India and Air India Express.
Voila! The relaxation worked like jet fuel and propelled the sale process to a scenario which saw expressions of interest from as many as sevn bidders.
There was a second turning point as well in the deal, according to insiders. In October 2020, the then aviation minister Hardeep Singh Puri announced that bids for Air India would be accepted on the basis of the carrier’s enterprise value instead of equity value. How did this switch help?
The enterprise value of a firm includes the equity value, debt as well as cash. On the other hand, equity value measures the value of a company’s shares.
“If you go via the equity route, you will have to pre-fix the debt level, which may end up being understated or overstated depending on market conditions. This could have made the entire process unviable,” a senior official told Moneycontrol on the condition of anonymity.
WAS THERE A THRESHOLD FOR FINANCIAL BIDS?
Of course. The government followed the reserve price mechanism. The reserve price is the benchmark price, below which the government would not have accepted bids. To arrive at this figure, the Modi regime engaged an independent valuer who would consider aspects like future cash flow projection, brand value and intangible assets like bilateral rights.
The reserve price for the deal was set at Rs 12,906 crore and it was finalised before the opening of the sealed financial bids from the two final suitors – the Tata Group and a consortium led by SpiceJet chairman Ajay Singh.
The winning bid of the Tatas was comfortably above the reserve price—Rs 18,000 crore which included a Rs 2,700 crore cash component and Rs 15,300 crore of debt (remember, enterprise value and not equity value).
So will the salt-to-software conglomerate suffer from a winner’s curse having shelled out nearly 50 percent more than the reserve price? Well, the jury’s out on that.
WINNING AIR INDIA: POINTS TO PONDER & PLUSES FOR TATAS
According to a senior executive, “One has to achieve a certain scale as an airline before you start making cash, especially if the operations involve international routes. With this leap, the Tatas may have crossed that threshold and they will get a huge number of planes as well. “
Not bad, eh? But hold on, it ain’t all hunky dory.
“It’s important for a bidder to be aware of all the risks in a transaction which need to be disclosed fully. That’s when they can be priced into the final valuation. If these risks are not clear, then the group’s balance sheet may be jeopardised,” a third individual close to the sale process told Moneycontrol
He added, “Amongst other factors, one of the immediate cash outflows of the Tata group could be linked to refurbishing the Air India fleet.”
Also remember, backend systems and customer service weren’t exactly Air India’s strengths either.
DIPAM Secretary Tuhin Kanta Pandey called the net worth of the airline “deeply, deeply, deeply negative” at around Rs -44,000 crore. Going ahead, it will be interesting to see how much more the Tatas need to pump in to keep the Maharaja soaring.
There is no bar on a merger with existing operations as well, but the owner has to maintain 51 per cent equity. So the mandarins at Bombay House will need to stitch a seamless integration strategy with existing operations at Vistara and Air Asia India, and that may throw up challenges, chiefly cultural.
THE MAHARAJA’S HUMAN RESOURCES: THE X FACTOR?
Air India has around 12,085 employees, including 8,084 permanent employees. Its arm Air India Express, on the other hand, has 1,434 employees.
The good news for them is that there will no sacking and the Tata Group has to retain all employees of Air India for one year. In the second year, if anyone is sacked, they will have to be paid VRS.
One of the persons cited above added, “The way I see it, the pilots and engineering crew of Air India are a valuable lot. You need a specific trained manpower who can fly long haul (double aisle planes) and the presence of these employees is a positive.”
Though there are critics who believe the employee base is surplus and assimilation will be challenging. Remember, the integration between Air India and Indian Airlines is still an unfinished task after so many years.
AIR INDIA SALE: THE COMPETITION FACTOR
According to note by research firm Elara Capital, “With majority stake in three domestic carriers – Vistara, Air Asia India and AI – the Tata Group’s airlines will cumulatively enjoy the second largest domestic market share at ~25%, after Interglobe Aviation (IndiGo) at ~60%.”
So is there a possibility that the deal may face scrutiny from the anti-monopoly watchdog—the Competition Commission of India?
Importantly, what are the parameters typically relied upon by the regulator in such deals in the aviation segment?
According to Vaibhav Choukse, Partner ( Competition Law) at law firm J Sagar Associates, “In airline mergers, the CCI would try to ensure continued competition on all routes affected by the merger/alliance. To examine airline mergers, the CCI uses internationally accepted ‘point of origin/point of destination’ (O&D) pair approach. According to this approach, every combination of a point of origin and a point of destination should be considered to be a separate market from the customer’s viewpoint. For example, Delhi to Dubai flight route would constitute a separate market and the CCI would see whether post the merger the combined entity faces enough competition. Hence, market shares will play an important role in this assessment. “
“If after examination, the CCI feels that there are competition concerns, they can impose a set of remedies that have the effect of making new entry possible as a condition for approval. However, where the network overlap is substantial, and economic benefits in relation to the harm to competition are rather low, prohibition of the transaction may be the only answer, in the absence of effective remedies,” the expert added.
A proposed acquisition of 24 percent of Jet Airways by Etihad was cleared by the CCI in 2013. It can give the green signal to such combinations if the same have no ‘appreciable adverse effect’ on competition. Under the norms, if the regulator fails to approve the deal within 210 days, or if it does not pass any order or issue any directions, then the combination is deemed to be approved.
Interestingly, in the past for specific PSU to PSU transactions in the banking and oil and gas sector, the government provided specific exemption from CCI approvals.
FINE, THE TATAS WON! BUT HAS THE SALE SOLVED THE GOVERNMENTS LIABILITIES?
It has to a certain extent, but definitely not entirely. As of August 31, 2021, the total debt of government owned Air India and its subsidiaries was a hefty Rs 61,562 crore.
So how much of this burden will be taken over by the Tatas? The debt component of the Tatas’ winning bid of Rs 18,000 crore was Rs 15,300 crore. Subtract this portion and the government is left with Rs 46,262 crore.
Now add the current liabilities of Rs 15,834 crore, which gives you a sum of Rs 62,096 crore.
At this stage, keep in mind, that the deal does not include non-core assets including land and building, valued at Rs 14,718 crore, which are to be transferred to the government’s.
Finally, from Rs 62,09 crore, deduct a combination of the cash consideration of the Tata bid ( Rs 2,700 crore) and the value of the non-core assets cited above (Rs 14,718 crore).
That finally gives you the number of Rs 44,678 crore. In other words, that is the impact on the government’s finances.
On the brighter side, the successful sale of Air India is bound to make private sector bidders confident and galvanie other disinvestment procedures which have been moving at a snail’s pace.