Airlines Deals

A multimillion- dollar plan by Jet Airways, India’s largest private airline, to take over a rival, Sahara, has collapsed, apparently a victim of the country’s slumping stock market.

A deadline to complete the $500 million deal by late Wednesday passed without an agreement. Signaling the breakdown of the deal, Air Sahara said it had taken back control of its airline as of midnight Wednesday. Jet Airways had been managing the airline’s operations for the last six months.

Jet Airways, which commands more than a third of the world’s fastest-growing airline market, has seen its share price plummet 40 percent since the deal was announced in January amid concerns over price.

The acquisition of Air Sahara, owned by the family-run Sahara Group, would have made Jet Airways the country’s largest airline with over half the market share in India. The deal, which would have been the largest merger in Indian aviation, was struck when Indian stock markets were on an upward trajectory.

“The stock market conditions were different in January, the valuations were different, and investors’ interest in airlines was very high,” said Kapil Kaul, vice president of the Center for Asia Pacific Aviation, an aviation industry consultancy based in Sydney.

Jet Airways’ share price rose 1.6 percent to 705 rupees, or $15.30, Wednesday.

Analysts suggested that Jet Airways had overvalued its rival and committed a strategic miscalculation by agreeing for a high price. A Jet Airways official declined to comment.

An Air Sahara spokesperson said that Jet Airways had attempted to renegotiate the deal price this week.

“Air Sahara did not agree to cut the price but offered to extend the date of closure for the deal by 15 days,” said Neeta Raina, spokesperson for Air Sahara. Jet Airways did not accept, she said.

Jet Airways pulled out of the deal on a “technicality” that it did not receive the necessary regulatory approvals before the final date of closure of the deal on Wednesday, Raina said.

The parties now appear headed for a protracted legal wrangle. On Wednesday, the High Court in Lucknow, where Sahara Group is based, froze the escrow account in which Jet Airways had deposited $330 million as advance for the acquisition, following a petition by Air Sahara to restrain Jet Airways from accessing the account.

Jet Airways, meanwhile, appealed to the Mumbai High Court to stop Air Sahara from withdrawing funds from the same account.

Investors have been questioning what they see as high valuations for many initial public offerings, including airlines, ever since India’s markets followed the recent global trend and plummeted on anxieties about inflation and interest rates.

The breakdown of the Jet Airways acquisition is expected to make the operations of Air Sahara an uphill struggle.

“Since Jet Airways literally walked out on them in the middle of the night, Sahara will have to regroup, find the finances to make the airline operations and look for new suitors,” said Kaul, the aviation analyst.

But there are signs that investors are still bullish on airlines at the right valuations because of the market potential in India. Fewer than 1 percent of India’s 1.1 billion people currently fly.

In March, passenger traffic grew 46 percent compared with a year earlier. Domestic traffic grew 28 percent to 25 million passengers.

India’s airlines placed orders worth about $12 billion at last year’s Paris Air show. The Center for Asia Pacific Aviation has forecast a growth of over 25 percent in the next five years and projected over 70 million domestic passengers by 2010. At the current 28 percent growth rates, India is the world’s fastest- growing market, albeit from a low base.

In comparison, Chinese airlines carried 150 million passengers last year and traffic is growing at 15 percent.

After pulling out of the Air Sahara deal, Jet Airways is expected to use the funds to fuel its own aggressive expansion plans, both in its domestic and international networks.

The long-term outlook for India’s airline market is widely believed to be bullish. But rising fuel costs, intense competition, dilapidated infrastructure in the form of crowded airports, overworked air traffic controls and a shortage of airline staff are expected to toughen market conditions for the players in the next couple of years

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Air Sahara today filed a caveat in the Supreme Court with a view to prevent Jet Airways from getting an ex-parte order on its transfer petition, which is likely to be filed today.

Jet Airways, which had yesterday said it would file a petition seeking transfer of all cases pending in Lucknow court and the Bombay High Court, is likely to do so later today.

The caveat, filed on behalf of Sahara India Commercial Corporation, urged the apex court that nothing should be done in the matter without any notice to it.

Jet Airways had yesterday described the collapse of its Rs 2,300 crore deal to acquire Air Sahara as “unfortunate” and blamed “vested interests” for making inaccurate statements.

It had also said that its decision not to salvage the pact was based purely on ‘commercial considerations’ and that it was moving the Supreme Court for transfer of litigation in different courts.

“For commercial reasons, and in the interest of Jet Airways, and its family of shareholders, the management decided not to extend the time”, the airline had said.

Alleging that Jet had terminated the contract, Sahara had moved the District Court in Lucknow on June 21 and sought an interim stay on operation of the escrow account and followed it up with another injuction on the sale of share pledged by it to Jet for an advance of Rs 500 crore. The issue is slated to come up for hearing on June 30.

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Subrata Roy’s Sahara Pariwar group resumed control of Air Sahara Thursday after the expiry of the midnight deadline to sell the carrier to rival Jet Airways even as parallel parleys began on damage control.

Both carriers had already filed lawsuits against each other Wednesday - each seeking to restrain the other from withdrawing the monies deposited in a common bank account as guarantees and advance for the Rs.23 billion ($550 million) deal.

‘With Sahara deciding to resume independent operations, the acquisition deal is all but over. Sahara Pariwar is looking at the possibilities of claiming damages from Jet for the loss of business,’ an aviation industry official said Thursday.

‘Air Sahara was being virtually run by Jet Airways for the past few months and is now pointing accusatory finger at Jet Airways for the loss of business, money and goodwill because of the failed merger issue,’ the analyst told IANS.

‘The issue now has gone to court. We are in no position to comment on it at this juncture. Please wait for further developments,’ a Jet official said here, adding that a series of internal meetings were on to discuss the developments.

The developments were also closely watched by the aviation industry, especially since the management and control of Air Sahara - which was with Jet since April - has come back to the parent group.

‘What is crucial is the question of Air Sahara being able to pull through and regain its market position that it enjoyed before the merger,’ a senior official of a rival airline said.

Jet has been saying that it failed to get a seat for its chairman Naresh Goyal on the board of Air Sahara since regulatory clearances were not coming by and that was one of the preconditions of the takeover.

But Air Sahara officials had a different story to tell. ‘Do you think one needs to be on the board of a company to run it? The names of four Jet nominees were already cleared. The issue was of valuation,’ an official said.

Air Sahara, meanwhile, was also looking at other options such as raising money for immediate operations, even as Vijay Mallya, the flamboyant boss of low-cost carrier Kingfisher Airlines, once again entered the fray to acquire the carrier.

‘We are looking at around $100 million,’ Air Sahara president Aloke Sharma said, as executives of Mallya’s Bangalore-based UB group were asked to renegotiate with the Sahara group after a failed attempt last year.

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The Sahara Group has resumed charge of Air Sahara and started normal operations.

Sahara resumed the charge after the expiry of deadline for transaction of acquisition of Air Sahara by Jet Airways.

“We have resumed charge and have started operating the airline from midnight last night,” said a Sahara Group official.

Sahara’s taking over of operations comes after the Rs 2,300 crore acquisition of Air Sahara by Jet Airways collapsed, over five months after the biggest deal in Indian civil aviation sector was announced.

After operating Sahara for some time, Jet was apparently unhappy with its liabilities and sought a discount on the deal.

Air Sahara refused to renegotiate the price, sparking the collapse as the acquisition deadline ran out at midnight.

Financial mess

The balance sheet of Air Sahara indicates a financial mess, which is believed to have led Jet Airways to change its mind in the deal.

At the time of the deal, Sahara’s losses ran up to Rs 226 crore and within two months of the takeover between January 19 and March 23, Sahara saw losses of about Rs 164 crore.

Jet Airways also discovered that between September 2005 and January 2006, Sahara’s liabilities had grown to Rs 443 crore from just 238 crore.

The net cost on defective engines alone was in the range of Rs 23 crore.

The cash flow statement is also dismal. In June 2006, Air Sahara had a negative cash flow of Rs 5,268 crore.

Fresh equity

Air Sahara was hoping half of that would be wiped out by Jet bringing in fresh equity.

Jet and its auditors Ernst and Young also differed with the numbers that Sahara was showing in its balance sheet.

According to Sahara Profit After Tax (PAT) as on January 18, 2006, there was a loss of Rs 26 crore, but Jet and E&Y found out that losses for the same period were actually a lot higher at Rs 252 crore on an income of Rs 1,500 crore.

Air Sahara has denied that they are losing money.

“We are going to close the accounts in 2006. We are likely to close in terms of revenue much higher than what we did in 2004-2005,” said Air Sahara’s President Alok Sharma.

Industry sources say Air Sahara is losing about Rs 100 crore every month and the near future will see more difficulty as the lean season begins. (With PTI inputs)

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Alok Sharma, president of Air Sahara, has been designated to speak on behalf of the company on the controversial deal between Sahara and Jet Airways which is now pending before district court in Lucknow for hearing.

Air Sahara had signed a deal on January 18, 2006 with Jet Airways with much fanfare to sell the airline for over $500 million. Jet Airways paid advance money and deposited a security amount in an escrow account for the deal. But just before the deal could be sealed Jet backed out.

“All the requirements to complete the deal have been fulfilled and now the matter is before the district courts,” Alok Sharma told rediff.com in an exclusive interview:

Why did the Jet-Air Sahara deal fall?

We think that all the requirements to complete the deal have been fulfilled and now the matter is pending before the district court. I would not like to say anything more on the matter.

Any chance of the deal being revived?

As I said the matter is before the court and let the court decide.

The same thing happened in case of Mittal and Arcelor. The matter went to court and now we have the two sides reaching an agreement. Can’t something like that happen in the present case?

True that the case of Mittals and Arcelor had many twists and turns. But our case is different from Mittal, the steel gaint. The two cannot be put into the same category.

In our case, our aircraft — 27 of them — were being run under the supervision of the Jet Airways for the last four-and-a-half months. In Mittal’s case no such thing had happened.

Is it true that there were differences between Saharashri (Subrata Roy) and his son Seemanto over the deal that led to falling of the deal?

There is no truth in it. The whole thing is out of context and has no basis. There are no family differences.

What according to you are the reasons for Naresh Goyal backing out of the deal?

According to feelers available to us, Jet has a financial resources crunch and we were told to take a cut of 10-20 per cent of the total deal which is over $500 million.

Did you offer more time to Jet?

When we learnt that the clearance from the government about the antecedents had not come, we offered to give them 15 more days. We were sounded out that they were not willing to do that.

Are there any political reasons for not going through the deal?

What political reasons can there be I fail to understand.

There have been news reports saying that the Americans want details of Jet Airways’ financial dealings?

We have also heard about it, but we have no details.

Jet said that your maintenance of aircraft was bad. . .

It is Jet Airways that has been supervising maintenance of our fleet for last four-and-a-half months. We have the strong maintenance service providers like Lufthansa Technik and KLM Engineering & Maintenance. Secondly, no aircraft which is not airworthy is allowed to take off. The maintenance standards required to be followed by airlines across the world are very rigid and the records are meticulously kept.

Another allegation is that your losses are far too high. . .

Jet Airways had a complete report with them before signing the deal. These reports are duly printed and audited. It is easy to pick holes after the event.

What was the problem between Air Sahara and Jet Airways pilots?

Our pilots are paid better than the ones who fly Jet. They feared the lower pay scales applicable to Jet pilots would apply to them as well.

When there is a clause of arbitration, why did you rush to court?

Both parties moved the court.

Are you afraid of financial losses if you accept Jet’s condition to cut by 10-20 per cent in the deal?

It is not a question of money. It is a question of ethics. We had got two bids: one by Jet and other by Kingfisher, and the latter had quoted $600 million — $100 million more than Jet — and still we went for deal with Jet.

How will Jet shareholders be hit?
Jet-Air Sahara deal off
Court bars Jet from selling Sahara’s share

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After the much-touted takeover of Air Sahara by the country’s largest private airline Jet Airways collapsed last night, the Sahara Group resumed charge of Air Sahara and started normal opertions from today.

“I see energy and enthusiasm in people behind the counters… Absolutely new freshness in them… If at all I see something, I am seeing something positive,” Air Sahara President Alok Sharma told reporters at Delhi airport here.

The airline would give passengers very good service, he said, adding, “they (Air Sahara employees) are looking after passengers very well.”

About Jet describing Air Sahara as a loss-making enterprise, Sharma said the numbers being quoted were far from truth.

“Had the clearance come in, the numbers would not have gone bad,” he said, taking a dig at Jet officials.

“Many of the things going around are figment of imagination,” he added.

Sahara Group took over operations after Jet Airways’ Rs 2,300 crore bid to acquire Air Sahara collapsed yesterday, more than five months after the biggest deal in Indian civil aviation sector was announced.

Sharma had told reporters last night that if there was no response from Jet Airways, Sahara group would take back control of Air Sahara operations.

“Wish us luck, Air Sahara is on its own from tomorrow,” Sharma had said on Wednesday.

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Subrata Roy’s Sahara Pariwar group resumed control of Air Sahara on Thursday after the expiry of the midnight deadline to sell the carrier to rival Jet Airways even as parallel parleys began on damage control.

Both carriers had already filed lawsuits against each other on Wednesday - each seeking to restrain the other from withdrawing the monies deposited in a common bank account as guarantees and advance for the Rs 2,300 crore ($550 million) deal.

“With Sahara deciding to resume independent operations, the acquisition deal is all but over. Sahara Pariwar is looking at the possibilities of claiming damages from Jet for the loss of business,” an aviation industry official said on Thursday.

“Air Sahara was being virtually run by Jet Airways for the past few months and is now pointing accusatory finger at Jet Airways for the loss of business, money and goodwill because of the failed merger issue,” the analyst said.

“The issue now has gone to court. We are in no position to comment on it at this juncture. Please wait for further developments,” a Jet official said here, adding that a series of internal meetings were on to discuss the developments.

The developments were also closely watched by the aviation industry, especially since the management and control of Air Sahara - which was with Jet since April - has come back to the parent group.

“What is crucial is the question of Air Sahara being able to pull through and regain its market position that it enjoyed before the merger,” a senior official of a rival airline said.

Jet has been saying that it failed to get a seat for its chairman Naresh Goyal on the board of Air Sahara since regulatory clearances were not coming by and that was one of the preconditions of the takeover.

But Air Sahara officials had a different story to tell. “Do you think one needs to be on the board of a company to run it? The names of four Jet nominees were already cleared. The issue was of valuation,” an official said.

Air Sahara, meanwhile, was also looking at other options such as raising money for immediate operations, even as Vijay Mallya, the flamboyant boss of low-cost carrier Kingfisher Airlines, once again entered the fray to acquire the carrier.

“We are looking at around $100 million,” Air Sahara president Aloke Sharma said, as executives of Mallya’s Bangalore-based UB group were asked to renegotiate with the Sahara group after a failed attempt last year.

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After almost three months Sahara is back to managing its airline. And this is not the best of times, Sahara’s market share is down and senior employees have quit. So can it fly alone? The flight ahead maybe difficult, but not impossible, reports CNBC-TV18.

Judging by these figures, Air Sahara is in deep trouble. 10 aircrafts out of a fleet of 27 are grounded for technical reasons. The first fight will be to get all planes in the air. Retaining skilled staff is the other challenge. 35 pilots and some engineers have already resigned, with more threatening to follow.

In the past 3 months, Jet Airways was supervising a majority of crucial operations. With them gone, Air Sahara has to re-staff operations. But the airline is putting up a brave face.

Exec President, Air Sahara, Alok Sharma says, “We are on schedule. We are alright. We have done this for long.”

Air Sahara says that it needs about USD 150 million to be fighting fit. Aviation analysts estimate the figure at upward of USD 400 million. Raising it won’t be easy. Air Sahara has also been losing money, but so have the other airlines. The bigger threat is the information outage. In the lead up to the cancelled deal, Jet has gathered enough inside information on Air Sahara to hurt it.

Director, CAPA, Kapil Kaul says, “They can seriously hurt Air Sahara.” Data mining by Jet could also keep prospective buyers away. In a sensitive sector like aviation, secrets are closely guarded.

The next few months will be crucial for Air Sahara. It will have to revamp operations, rejuvenate its staff in an effort to try and re-establish its foothold on the tarmac. The task is a difficult one, but not impossible if they get some money.

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The Rs. 2,300-crore deal for the takeover of Air Sahara by India’s largest private airline Jet Airways fell through late on Wednesday.

This follows the failure of Jet Chairman and Managing Director Naresh Goyal to secure clearance from the Directorate-General of Civil Aviation required for joining the Board of Air Sahara.

Despite Sahara’s offer to extend the deadline for the deal by 15 days, Jet failed to respond. As a result, management control of Air Sahara will be restored to the Sahara group. — PTI

New Delhi Special Correspondent reports:

Earlier, addressing a hurriedly convened press conference here, Air Sahara president Alok Sharma said: “From Thursday, we are going to run our airline as if there had not been any deal. It is our firm belief that we will be able to run the airline as we have been doing over the past 13 years,” he said.

Record turnover

Mr. Sharma expressed confidence that Air Sahara would be revived by its own management with impressive passenger load factors. Maintaining that the private carrier never faced any financial problem, he said it posted profits over the past three years, recording a turnover of around Rs. 1,700 crore each year. The market share of Sahara was 12 per cent in January this year, growing by six per cent.

In his first public comments, Mr. Sharma said Air Sahara was not ready to reconsider its evaluation pegged at Rs. 2,300 crore as Jet Airways reportedly wanted to reduce it by 20 per cent. However, he refused to comment on legal matters.

“We had made an offer for a possible extension of deadline, which is still available with Jet. Our offer of four members on the Board is also available,” Mr. Sharma told reporters.

Jet had demanded the appointment of five members on the Air Sahara Board. While four secured official clearance, that of its Chairman Naresh Goyal is still pending with the Government. Mr. Sharma, however, said Sahara had not heard from Jet. Asked what was the reason for the delay, he said regulatory approvals held back the completion of the deal. “If there is no choice, then we will terminate it on technical grounds,” he added.

“We have moved the Lucknow court, seeking to restrain Jet Airways from operating the escrow account, which currently has Rs. 1,500 crore,” Mr. Sharma said.

Restraint on Jet

Earlier in the day, each of the private carriers took recourse to legal action. Developments took a surprising turn when Air Sahara moved a Lucknow court and got an interim order restraining Jet from withdrawing Rs. 500 crore from the escrow account. The freeze on the account is till June 23.

Jet moved the Bombay High Court seeking a similar restraint on Air Sahara, saying the conditions agreed upon such as transfer of infrastructure by June 21 had not been met. Hence, Air Sahara should not be allowed to operate the escrow account.

Air Sahara petitioned the Lucknow court, saying that Jet Airways terminated the takeover agreement and secured an interim stay on operation of escrow account till June 23. District and Sessions Judge Shiv Charan Singh also restrained ICICI Bank, where the account has been opened, not to make any payment to Jet Airways.

In his interim order Mr. Singh said: “It has been alleged on behalf of the petitioner that the opposite party [Jet] has terminated the contract, hence there is a dispute, for which arbitrator is to be appointed in due course.” The court gave Jet time till June 23 to file objections to Sahara’s contention on the deal.

The order came on a petition filed by Sahara India Commercial Corporation Ltd, holding company of Air Sahara, under Section 9 of the Arbitration and Conciliation Act.

While parking the entire money for the deal in the account, Jet had paid Rs. 500 crore against guarantees to Air Sahara in March and given an advance of Rs. 100 crore to Sahara without guarantees. Under the agreement, Air Sahara was entitled to claim Rs. 500 crore from the escrow agent only on completion of the takeover.

According to the deal, Jet maintained that Sahara had to repay Rs. 500 crore within seven days of termination of the agreement without any dispute.

Security clearance from the Union Home Ministry to Jet Airways chairman to head the board of the new corporate entity after Jet’s acquisition of Sahara was yet to come.

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Jet Airways clarified its position yesterday in relation to the current controversy surroundings its deal with Sahara.

Despite this, some sections of the media have carried an impression that Jet Airways “blames” the Government for the lapsing of the deal.

Jet Airways maintains that there is no question of any “blame”.

Commercial deals are fashioned to respond to events, and they have to be factored in as commercial risk. Government policy, in evolving markets, is always a recognized commercial consideration and is generally dealt with in large commercial deals.

The deal was based on some assumptions – which were in turn made conditions precedent. Since they did not materialize, the deal lapsed. In such a situation, there is no occasion to “blame” anyone or any agency.

Jet Airways reiterates that the reform of the civil aviation sector has been relatively fast-paced and has never had any reason to complain about any government policy.

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