Ravi Ananthanarayanan
Jet Airways (India)’s shares have been volatile this week. Prospective acquirer Etihad Airways is driving a tough bargain and that is making investors cautious. If the SpiceJet bailout case is used as a precedent to argue for a similar treatment for Jet Airways, then they should turn very cautious.
Investors are usually excited at the prospect of an acquisition, more so when a foreign-owned company is a suitor. While the mandatory open offer holds out the promise of a windfall, there is a bump-up in valuations when an MNC tag is attached. In distress cases such as Jet Airways, existential worries also come to an end.
However, when the bidder acts tough the gains can diminish. News reports indicate Etihad is seeking an exemption from an open offer. It also wants to invest in Jet Airways’ equity at a discount to the market price. Etihad is apparently asking to invest in Jet Airways’ equity shares at Rs 150/share, compared to the market price of Rs 278. While that may be the fair value of Jet Airways as assessed by Etihad, it also allows it to average its cost of acquisition. In April 2013, Etihad had agreed to pay Rs 755/share to acquire a 24 percent equity stake in Jet Airways. It’s sitting on a significant loss on paper already.
One school of thought could be that Etihad has to follow the law and no exemptions should apply. But Etihad may be taking inspiration from SpiceJet’s bailout. The current promoter, Ajay Singh, acquired the then promoter Kalanithi Maran’s stake through a ‘Scheme of Reconstruction and Revival for Takeover of Ownership, Management and Control of SpiceJet Limited’. This scheme was presented to the Ministry of Civil Aviation, and according to SpiceJet’s annual report, it detailed the change in ownership and the infusion of fresh funds into SpiceJet to support its turnaround plan. There was no open offer that was required.
Now, there was no specific exemption given by SEBI. Instead, it appeared that the acquirers concluded that the transaction qualified for an exemption from an open offer. This was based on the acquisition being done through a scheme of arrangement that was approved by a competent authority. This article in The Firm has more details.
The circumstances surrounding Jet Airways is similar. It is facing a funds crunch that is affecting its ability to meet payment obligations to employees, to aircraft lessors and other vendors. On December 31, 2018, it defaulted on debt repayments as well.
While bankers are reportedly considering Etihad’s offer, on January 17, news reports indicated current Jet Airways promoter Naresh Goyal is also willing to invest Rs 700 crore in the company but with strings attached.
The ball is chiefly in the court of the lenders who have to now decide, possibly in consultation with the government, on the best way to get equity funding into Jet.
Attempting to benefit in the short term from a prospective deal does appear risky for shareholders given the uncertain structure. Jet Airways may still benefit from stronger management and ownership in the cockpit, but that may play out over a longer period. Ultimately, that’s the lesson from the SpiceJet episode as well, as the company has subsequently turned into one of the better performing airlines in the country.
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