After taking off on talk of stake sale to Etihad, the Jet Airways stock has been climbing down with no announcement in sight of the deal.
But the Wednesday deal helps Jet Airways kill two birds with one stone. First, it infuses fresh funds into the debt-laden airline.
The Rs 2,060-crore payment by Etihad should help Jet pare its huge debt liability of around Rs 12,000 crore (as on December 2012).
If the entire proceeds from Etihad are used to repay debt, the average cost of which is around six per cent, Jet will save around Rs 120 crore on interest cost annually.
This will add to the earnings for Jet’s shareholders, offsetting the 31.5 per cent expansion in the equity base. It will also help reduce the standalone debt-equity ratio from around 11 times to nine. Debt levels, however, will still remain far above the comfort zone.
Jet also benefits from having a moneyed partner as a strategic investor. This should help it access low-cost funds.
Next, this move helps the promoter group (Naresh Goyal and entities controlled by him) reduce stake from the current 80 per cent to less than 75 per cent before end-June, as required by SEBI regulations.
After the preferential issue of shares to Etihad, the promoters will hold a shade less than 61 per cent in Jet Airways.
Even so, the reins remain in the hands of the existing promoter group for purposes of any strategic decisions in future.
However, the deal could bring some disappointment for investors in the Jet stock, if they were hoping for an exit through an open offer.
By restricting Etihad’s holding to 24 per cent, the deal circumvents the need for the new buyer to make an open offer to public shareholders.
An open offer to public shareholders for acquiring an additional 26 per cent stake would have been mandated if Etihad’s stake in Jet had touched 25 per cent. However, as FDI in an Indian airline cannot exceed 49 per cent, the deal is structured such that an open offer is obviated and the FDI level is not breached.
Essentially, public shareholders will not get to the benefit of the the steep 31.5 per cent premium over market price Etihad is paying.
The UAE-based carrier is paying Rs 754.7 a share against Jet’s market price of Rs 574. Annualising Jet’s nine-month financials till December 2012, the deal pegs Jet’s enterprise value at around nine times its operating profits for FY13.
This is higher than what airlines in the Asia region currently command (6-8.5 times).