Air India sale on uncertain path, bidding likely to be deferred again

New global-standard bid conditions may still not yield optimum results for the government

This year, the government has had to postpone bidding for Air India four times on account of the pandemic. A fifth postponement looks imminent. Ahead of that, the government has altered bidding conditions — the second change since the airline went on the block in 2018 — to allow prospective suitors to bid on the global norm of enterprise value. Will it alter the prospects for this ailing airline to find a buyer?
 

Covid-19 has certainly taken its toll. In January, for instance, as the Tata group’s full-service airline Vistara, a 51-49 venture between Tata Sons and Singapore Airlines, was preparing to welcome its first wide-body aircraft and launch long-haul destinations, a joint team was putting the finishing touches to a presentation for the Tata Sons board on the acquisition of Air India.
 

The arithmetic was all done: Acquiring Air India, the presentation said, would transform the Tata group’s aviation business — which has a market share of just 10 per cent between Vistara and its AirAsia joint venture — into a leading Indian international player and enable it to challenge market leader IndiGo on the domestic front (where Air India has a 12.7 per cent share). Acquiring this heft was worth the financial outgo, the Tata-SIA presentation suggested.

 

“Which company would not be interested in evaluating a sovereign airline of the country?... Whether we bid or not comes later. We are evaluating it as a joint venture,” Bhaskar Bhat, chairman of Vistara and a director on Tata Sons board, had then said. In fact, the Tata group was widely considered the favourite to win back the airline it had owned till the 1960s.
 

Then the Covid-19 pandemic hit. In the second week of March, India closed international flights and imposed a total shutdown. With the infection raging over the globe, the International Air Transport Association, the global trade association, downgraded its traffic forecast for 2020 and predicted a recovery of international air travel only from 2022. In fact, sources said, with Singapore Airlines’ bread and butter — international traffic — under pressure, the group doesn’t find it feasible to support a major acquisition now.
 

For Air India, with accumulated losses of around Rs 5,300 crore in FY 21, the timing could not have been worse. “We were proceeding at a very good pace before the pandemic. We had issued a new Expression of Interest (EoI), we had worked out certain debt levels, we have a very important condition of net current liabilities to be zero,” said a senior government official involved in the process.
 

The government sought a solution from transaction advisor EY, which suggested either postponing the sale for two years in order for the market to improve or close down the airline. Waiting two years would entail a cost of Rs 15,000 crore, which the government believes will be difficult to recover even in 2022. Closure will also extract a huge cost. Air India has sovereign-backed debt of almost Rs 58,000 crore, which would mean the government has to repay it over and above severance pay for the airline’s 9,900-odd employees.
 

Indeed, the debt burden has been the sticking point in the sell-off effort. In 2018, an EoI drew no responses, principally because it entailed the government retaining a 24 per cent stake and debts and liabilities that were Rs 33,000 crore at the time.

The 2020 EoI included major changes; this time the government was offering 100 per cent equity. Meanwhile, in the run-up to the October 31 deadline, the government sought to improve the bidding terms by proposing the enterprise value model.

Enterprise value includes the equity value of a company along with short-term and long-term debt as well as any cash on the company’s balance sheet.
 

According to the current sale terms, the buyer is required to take over debt of around Rs 23,286 crore. The debt is mainly on account of aircraft purchase, which is backed by sovereign guarantees (those guarantees will be withdrawn when the airline moves to private ownership). The new bid model, the government believes, will entice bidders because till now the market saw Rs 23,286 crore as minimum threshold of bid amount.
 

The sweetener, as a government official explained, is this. “Air India’s equity value is negative. Hardly anyone will be willing to pay for equity. But under current disinvestment rules, a negative bid isn’t allowed. So, a prospective bidder had to take over the debt amount. Now the bidders can quote a combined value based on equity and debt.” Subtracting the negative equity potentially reduces the debt component, and the proceeds from the bid can be used to retire whatever debt remains on the airline’s books, he pointed out.
 

This would encourage reluctant bidders to return to the boardroom. “If I am the market leader, I will definitely start calculating: What if someone takes this opportunity of buying Air India at, say, Rs 10,000 crore. I will definitely redo all my calculations,” said a merchant banker.
 

But the catch, again, is the state of the global market. “Besides financials, we will take the global and Indian peers into account while making a valuation for Air India,” a prospective bidder said. The problem here is that the valuation of airlines around the world has halved on a year-to-date basis.
 

For the government, the bottom line is that Air India is now a distress sale. As an aviation ministry official pointed out, “The Air India sale will not generate value for the government, but it will cut future bleeding. More than revenue, we are seeing it as a reform.” A possible fifth extension of the October 31 deadline by three months along with relaxed guidelines will indicate whether this “reform” has worked.