Jet Airways Takes Wing On Stake Sale To Etihad

The Indian aviation sector finally has some positive news after a long time as the long pending deal between Jet Airways and Abu Dhabi-based Etihad finally sailed through. The news of a possible stake buying by Etihad had been doing the rounds for the past three months and the deal was supposed to go through in February 2013 itself. However, it kept lingering for various reasons, though some smaller arrangements like the selling of a foreign slot by Jet Airways to Etihad did happen then.The conclusion of the stake sale has provided an impetus to Jet Airways, which hit the upper circuit on April 25, 2013. Let’s understand the proceedings of the deal and its potential impacts.

Etihad has agreed to buy 24% stake in Jet Airways for USD 379 million (around Rs 2060 crore). Here Jet will make a preferential allotment of 2.7 crore shares to Etihad Airways at a price of not less than Rs 754.74 per share.As a consequence of the deal, Jet Airways will also be compliant with the recent regulation of reducing promoter stake below 75% by July 2013. To meet the norms, Jet Airways will first launch a so-called Offer For Sale (OFS) of shares to lower the promoters’ holding. After the OFS, the promoters will hold 51% stake, Etihad 24% and the public will hold 25%.

Taking a look at the financial details, Etihad has paid around Rs 3250 crore to Jet Airways till date. This includes Rs 380 crore paid in slots at Heathrow Airport, an investment of Rs 815 crore in Jet’s customer loyalty programme in addition to Rs 2060 crore in the current deal.

It appears that Jet Airways has benefited more from this deal. Just one day before the deal, the market capitalisation of Jet Airways stood at Rs 4950 crore. Considering the Rs 3250 crore paid by Etihad, it could have bought more than 65% of stake in Jet Airways. However, the stake today only stands at 24%. This is said to be a deliberate attempt to keep it below the threshold limit of 26%, which could have triggered the open offer clause for minority shareholders.

Apart from the premium Jet Airways has received, there are certain other positives too. First, Jet Airways would be able to reduce its debt levels by around 30% from the levels of Rs 12000 crore (as on December 31, 2012). This would result in saving on interest costs to the tune of Rs 820-825 crore, a significant saving as it is more than half of the EBITDA of Rs 1569 crore that the carrier posted in the previous fiscal.

In addition, Etihad’s lenders have also agreed to provide a USD 150 million loan to Jet Airways at a miniscule interest rate of just 3%. With Jet Airways struggling to fund its operations, this news surely comes as a salve. This subsidised loan can cut the financing costs for the Indian carrier further.

Considering all these factors, it is no wonder that the Jet Airways’ stock has appreciated. We are of the opinion that the stock may keep its positive momentum alive, but the upward move would be capped to Rs 700.

One should also understand that this development may have a positive impact on the other airlines based in India. SpiceJet has already witnessed some momentum and is likely to soar strongly in the short-to-medium term.

However, the impact of this deal is likely to be negative for the state-owned Air India. It is reported that in the backdrop of the financial deal between Jet Airways and Abu Dhabi's national carrier Etihad, the two regions have decided to revise their air capacity upwards to 36670 seats per week (against a demand of 42000 seats per week that Abu Dhabi government had asked for) from the existing 13300 seats. According to reports, the increase will be spread over a period of three years, whereby 11000 seats will be added by December 2013, 12800 by 2014 and 12870 by 2015. This sparks concerns among the local airlines and private airports, and we feel that this may hurt the recovery of Air India.