CAPA India: Strategic Divestment of Air India Expected to Attract Significant Interest
12 April 2018
In recent days, both IndiGo and Jet Airways have issued statements advising that they will not be participating in the tender process for the divestment of Air India, pointing to unfavourable terms and conditions in the Expression of Interest (EOI) document. Furthermore, there has been media coverage that TATA/SIA are reportedly losing interest, leading to questions about the prospects for the entire transaction. However, TATA/SIA’s position remains pure speculation in the absence of an official statement from the group.
CAPA India does not at this stage subscribe to the conversation that these developments reflect negatively on the Air India opportunity. We continue to believe that Air India is a potentially valuable asset for strategic and financial investors and will attract significant interest. Prospective bidders may choose not to participate for their own internal reasons.
For example, IndiGo’s withdrawal is wise and in the interests of shareholders. The carrier is already executing a very aggressive organic expansion plan which requires the full attention and bandwidth of the management team. To simultaneously take on a challenge as complex as acquiring and restructuring Air India would be very risky. And most Indian carriers – except IndiGo – do not have the balance sheets to be able to bid for Air India, and hence their decision not to participate may be out of compulsion rather than choice. However, should it be correct that TATA/SIA is not bidding, this would be significant, but we will need to await a formal announcement.
The government has done well in issuing an EOI document which seeks to balance the interests of multiple stakeholders while moving the process forward, not an easy task by any means. Privatisation of a national flag carrier is inherently complex and sensitive. To that extent there is no EOI document that would please everyone. But for this reason, such transactions require flexibility,
CAPA has regularly stated that some of the key issues that have raised investor concerns include: the higher than expected debt that will remain with Air India; the need to retain the brand for an unspecified number of years; the requirement to operate the airline at arms-length from the investor’s other businesses; and uncertainty with respect to commitments to staff. The latter is particularly important as the prospect of encountering industrial unrest after investing billions of dollars is undoubtedly a deterrent. In addition, bidders will require a formal commitment from the government that it will not interfere in management of the airline despite retaining 24% equity.
Given the government’s commitment to executing the transaction successfully, we expect that it will be open to modifications that will better align the offer to investor interests (although domestic and international operations are unlikely to be split). Should appropriate changes be made to the EOI, we do not rule out the possibility of IndiGo and Jet Airways reconsidering their decision not to bid.
However, incorporating revisions will extend timelines, which means that formal transfer of ownership is more realistically likely to occur in the first quarter of 2019 rather than by December 2018.