Jet Buys out Sahara
by Parthasarthi Chakraborti, MBA 2005-07, IIITA Allahabad.
In a big step forward for the fast-growing aviation sector, the country's largest air carrier was created this month when Naresh Goyal-owned Jet Airways acquired Air Sahara in a Rs 2,300-crore all-cash deal. Jet is going to fund the Rs 2,300-crore acquisition through internal resources. After this deal Jet Airways will become the single largest Indian airline, criss crossing the Indian skies. This catapults Jet to the top 50 airlines of the world and marks the exit of Subroto Roy's Sahara Group from the domestic aviation map.
The deal is, however, subject to receipt of regulatory approvals as may be required. Sources said the deal was inclusive of all the liabilities of Air Sahara which were brought down to about Rs 150 crore ahead of the takeover agreement. This would mean the acquisition of 27 aircraft fleet for about Rs 2,450 crore, a price significantly lower than the valuation of up to one billion dollar that Air Sahara had done through Ernst and Young.
While the acquisition can be bankrolled in the interim through a bridge loan from banks for six-nine months (or little more time), the airline may have to opt for another public issue to clear its debts — domestic or international. The airline is already committed to raising Rs 5,000 crore to support its aircraft purchase plan for going international. Jet Airways is buying 20 wide-body planes with similar number of options, besides 10 more new-generation Boeing 737s.
This deal would help Jet increase its share to around 45 per cent from the current 35 per cent and the absorption of staff from Sahara would be on ‘merit basis'. Jet will use the resources, including the aircraft and manpower, for Jet Airways operations. For example, in case of a shortage of pilots and the acquisition will help to fill the gap. This raises a question mark on a seamless integration of Air Sahara's 4,400 employees into Jet. Both the airlines have distinct work ethics and pilots in Air Sahara are paid better
However Sahara Group later clarified that it has given an undertaking to each employee of Air Sahara that there will be no loss of jobs and cadres and gross emoluments will be unaffected after the deal. The absorption of the Sahara employees by Jet is still in the lap of future as it depends on a lot of factors like how well the employees of the two organizations gel together and whether Jet can attract that kind of traffic which would be able to keep the whole work force busy.
Jet Airways' acquisition of Sahara Airlines had its immediate impact on the bourses i.e. on that day itself, with the former's shares spurting by nearly 6.5 per cent on emergence of buying by funds and general investors. Jet Airways Ltd's shares rose by Rs 70.10 to Rs 1,198.80, soon after both the companies announced the deal. While the shares of closely held Sahara Airlines, were not listed on the bourses as yet.
Also the buyout of Air Sahara by Jet Airways is not likely to trigger any provisions of the Monopolies and Restrictive Trade Practices (MRTP) Act, according to the Ministry of Company Affairs. "The deal, as it appears now, does not attract the provisions of the Act," Mr. Prem Chand Gupta, Minister of State (Independent Charge) for Company Affairs said. This puts to rest all speculation that the deal leads to a possible abuse of dominant position by Jet Airways.
Jet officials said ‘Air Sahara' brand would be absorbed into Jet in the next two to three months. Sahara clarified the Air Sahara brand will cease to exist after confirmation of regulatory approvals but the sponsorship of the Indian cricket team will stay with the Sahara group. Which was a issue of contention between the two airlines. The issue of transfer of Sahara 's international flying rights to Jet will also come under the regulator Director General of Civil Aviation's scanner. While Jet will get its bilateral rights, the acquisition does not mean that, Jet will fly to the US . Jet's US plans is stalled due to regulatory clearances from India as well as from US.
This deal is expected to create ruffles in the Indian Airline market and will result in at least one more merger, most probably the merger of the Indian airline and the Air India. Because in the present market situation if these two national airlines don't merge together, then it will be impossible for them to compete with this newly created airline giant. In that case it is expected that Jet will run away with the majority of the market share.