After a series of changes to the bidding conditions and a number of deadline extensions, the government has finally closed the first phase of Air India’s disinvestment having received “multiple expressions of interest”. While in light of recent events concerning Air India’s disinvestment, this is an important step forward in the sale process, history of the airline’s strategic sale exercise would suggest there is still some way to go.
What is the history of Air India’s disinvestment?
The first ever attempt to conduct a strategic sale of the airline was made in 2001 during Atal Bihari Vajpayee’s NDA government, when 40% of the airline’s equity was put on the block. Initially a number of foreign airlines including Lufthansa, Swissair, Air France-Delta, British Airways, Emirates and Singapore Airlines expressed interest in buying the airline, in addition to corporate houses like Hinduja Group and Tata Group. But when the government clarified that any foreign airline will have to partner with an Indian company to bid, most airlines pulled themselves out of the race. The only one remaining was Singapore Airlines, which partnered with Tata Group. The Hinduja Group also remained in the fray, who, later that year, were named in the Bofors scandal, and consequently bowed out of the Air India sale. With this, the Tata-Singapore Airlines consortium remained the sole player in the race. The consortium was in the advanced stages of the deal and had even completed due diligence but decided to pull out at the last moment. Those in the know of the deal’s minutiae at the time suggest several factors coming together at the same time for the decision of withdrawal. One factor was the bombing at Colombo airport in 2001, in which several of Singapore Airlines’ aircraft were destroyed causing massive financial losses to the carrier. In addition to this, the company’s investments in other international airlines were facing headwinds. Without Singapore Airlines, the Tatas did not want to bid alone given that the former would have brought in the expertise to run the airline.
Cut to 2018. In the preceding 17 years, Air India went through a number of changes — the most major one being the 2007 merger with its domestic sister concern Indian Airlines. Also, during this time, the state-owned airline group accumulated humongous amount of debt — exceeding Rs 50,000 crore, in addition to other liabilities. While the airline’s routes and slots at some of the prime locations like London and New York, and a wide-bodied aircraft fleet made the case for the airline to be an attractive proposition, the debt remained a sticking point when the government attempted to disinvest its stake once again. However, in the 2018 bid to sell Air India, the government decided to hold on to 24% of the equity in the airline — therefore putting only 76% on the block — along with a portion of its debt. This again was seen as a big negative by potential investors and the process ended with not a single bid being received. The only expression of interest was an unsolicited one by India’s largest airline IndiGo, which — even before the government formally kicked off the process — wrote to the civil aviation ministry saying it was interested in buying Air India’s international operations.
What changed in the 2020 disinvestment attempt?
In January this year, the government brought Air India back to the strategic sale table with significant changes in the terms. Most significantly, the government said it would offload 100% of its stake in Air India. Further, over the past two years, the government allocated some part of Air India’s debt to a special-purpose vehicle and in this round of the disinvestment process, the buyer was to take on Rs 23,286 crore of debt out of a total Rs 60,074 crore. However, this again was a hurdle for a new investor given that in addition to cleaning the debt, the airline would need further investment for it to become healthy. The debt situation particularly worsened the disinvestment process given that just two months after the announcement, Covid19 and the subsequent lockdowns hit the airline industry globally, making it the worst ever period for the sector in history. In October, the government once again tweaked the bidding parameters and a key change was that the Centre took a call to allow prospective bidders the flexibility to decide the level of debt they wish to take on along with the loss-laden airline. The government said that potential bidders will be allowed to place their bids on the basis of enterprise value, which accounts for both equity as well as debt of the company.
How did this impact the process?
By the end of the December 14 deadline announced in October, Air India received at least two bids — one from Tata Sons and second from a consortium of a section of Air India employees and US-based financial investment firm Interups Inc. Tata Sons, which originally founded the airline in 1932 as Tata Airlines before it was nationalised in 1946, already operates two airlines in India — Vistara (a joint-venture with Singapore Airlines) and AirAsia India (a joint-venture with Malaysia’s AirAsia Bhd). According to sources, the Tata Group plans to consolidate all of its airline companies under a single brand and this will require the conglomerate negotiating with its joint-venture partners — the result of which may play a role in the final bidding for Air India. On the other hand, Interups Inc is a New York-based company, which plans to invest $9 billion in the aviation industry. The company plans to take 49% control of Air India with the remaining 51% being handed over to the participating employees of the airline.
What happens next?
Now that the expressions of interest have been submitted, the government will analyse them and select which among those are qualified interested bidders. These names will be announced on January 5. Once these qualified interested bidders are named, they will be allowed to make a financial bid for the airline based on the enterprise value. The winning entity will be decided on the basis of whoever quotes the highest enterprise value. This entity will then have to pay at least 15 per cent of the quoted enterprise value to the government in cash, while the rest can be taken on as debt.
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