Middle Eastern carrier Etihad Airways is poised to bail out the Naresh Goyal-run Jet Airways by raising its stake in the domestic airline, in light of the financial turbulence it has faced for the most part of last year. Sources told Reuters on Monday that lenders dont expect promoter Naresh Goyal to raise additional funds at this point and are instead banking on Etihad to keep the cash-strapped airline afloat.
Divestment of stake will take place according to the resolution plan proposed by State Bank of India (SBI) to Jet Airways foreign lenders and vendors earlier this month. Domestic lenders, led by SBI, are scheduled to meet on Wednesday to take a final call on increasing stake and restructuring.
Once investors back the resolution plan, Etihad Airways PJSC will take effective control of the debt-ridden domestic carrier, informed sources close to the ongoing negotiations.
How this affected shares
The news drove up the shares of the Indian airline, which rose as much as 7% in early trade on Tuesday.
The market value of Jet Airways had already spiked following a media report reported the capital infusion by Etihad, especially after it alleged that Goyal might step down and relinquish majority control. It is, however, not clear if he is stepping down from the board or as chairman, but there are reasons to believe that a handover is imminent.
How can Etihad help the airline?
Etihad has reportedly agreed to increase its stake in Jet Airways and will bring in fresh capital to the company, while also conducting talks with several foreign investors who can refinance a large portion of Jet Airways debt.
The airline’s existing rupee and dollar debt headed for maturity over the next few quarters. With Abu Dhabi-owned Etihad gaining control, the Mumbai-based carrier will be more equipped to raise debt locally as well as from overseas.
Raising stakes
However, sources clarified that Etihads acquisition will depend on how much control Goyal is willing to relinquish, including the capping of some of his promoter rights and operational control. His penchant for control had become an obstacle for interested parties wanting to buy out and rescue the airline.
According to the latest sources, Etihad reportedly wants its board representation in Jet Airways to go up from the two seats it has now.
With Etihad currently holding 24% of the shares in Jet Airways, the deal is expected to raise their ownership to 49% in the expanded equity base, the most that foreign carriers can own in a domestic airline as per Indian law. Moreover, as soon as stocks go beyond 255, Etihad is liable to make an offer to shareholders for majority of the shares, unless market regulator SEBI decides to award a rare exemption.
CNBC TV18 on Monday reported that Naresh and his wife Anita Goyal are prepared to dilute their 51% stake by 35%, with Goyal even agreeing to voting rights on capping his stake at 10%
What the deal may might look like
In the face of a looming financial crisis, Naresh Goyal, the founder and chairman of Jet, managed to rope in the Middle Eastern carrier, to invest in its equity and save the airline.
According to sources close to the development, Goyal met with Etihad CEO Tony Douglas and key members of the management in Dubai last year.
This meeting followed in the heels of Tata Groups hesitation to engage with the cash-strapped airline before a thorough due diligence probe is conducted into its financial liabilities. Tata Sons had also quoted a complete ownership stake, which would have forced Goyal to cede control, a deal that Goyal wasn’t completely on board with.
Why does the deal work for Etihad?
For Etihad, the deal makes sense from an investment perspective. Jet Privilege was sequestered from Jet Airways as an independent entity in 2014 after Etihad Airways PJSC bought a 50.1% stake for $150 million, valuing the firm at $300 million.
Last October, it further aimed to bring about financial restructuring and devised a support plan which allows for Jet Privilege members to pre-purchase discounted mileage redemption seats from Jet Airways, thus providing Jet with a windfall gain of $35 million.
Thus, not investing further would result in an overall loss for Etihad, in the event of a full-blown setback to Jet.
Furthermore, if Jet Airways isnt resuscitated soon, it could also have a direct impact on Etihads direct feed of passengers, since 11% of Etihads passengers originate from India to overseas destinations. It could also intensify competition with Dubai-based rival Emirates which flies about 18% of them.
Jet Airways is the largest airline on international routes to/from India, and it has a large network and numerous slots at key airports.
Prarthana Mitra is a staff writer at Qrius