 "Air India privatisation: Govt to ease bidding norms to attract buyers")
The government has decided to take another shot at privatising the debt-laden Air India with relaxed terms, as a postponement of the sale process would cost the exchequer an estimated Rs 12,000 crore in the next two years.
Rules will be changed to make it easier for prospective suitors to bid on enterprise value, a popular metric used in takeover deals. 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.
This, the government believes, will entice buyers who till now had considered the debt amount as a minimum threshold for a bid. Tata group, which operates two airlines Vistara and AirAsia India, is one of the favourites to acquire the government-owned company.
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, backed by sovereign guarantees. Those guarantees will be withdrawn when the airline moves to private ownership.
In the meantime, the government will infuse around Rs 1,000 crore more to keep the company as a going concern. While the model of fund infusion hasn’t been decided, it can be a direct equity infusion or in the form of a loan.
The decisions were taken by a committee of secretaries on Wednesday and will be sent to a group of ministers for an approval soon. The deadline to bid--currently October 30--is likely to be extended by two more months.
“Air India’s equity value is negative. Hardly, anyone will be willing to pay for equity. But under the current disinvestment rules, a negative bid isn’t allowed. So, a prospective bidder had to take over the debt amount. The changed rule means the bidders can quote a combined value, based on equity and debt. The highest one to quote that will win the bid. The proceeds from the bid can be used to retire whatever debt remains on the books of the company,” said a government official aware of the matter.
Rs 29,464 of the company’s debt has already been transferred to a special purpose vehicle (SPV).
Along with this key change, bidders will also be promised more flexibility on how to deal with human resources and assets in the later stage of bidding if the aviation sector’s condition is further worsened by the pandemic.
“Submission of expression of interest is only the first stage of the bidding process. By the time an entity submits a financial bid, it will be clear whether there is a second wave of the pandemic or a vaccine is near which will mean a sudden recovery of air travel,’’ a second official briefed on the matter said. Since the scenario of upside or downside is not clear, more relaxations in terms of workforce and assets have been put off, he pointed out.
According to the current rules, a new owner will have to give job protection of one year to its around 11,000 workforce. “If there is a palpable impact of the second wave of the pandemic and aircraft are grounded due to lockdowns, the new owner will certainly be given more flexibility,” the official said.
The International Air Transport Association (IATA) has downgraded its traffic forecast for 2020 to reflect a weaker-than-expected recovery of air travel demand. IATA fears that a complete recovery of international air travel may take at least two years.
While the government had contemplated cautioning transaction advisor EY that in the absence of recovery, prospective suitors may not be willing to go for an inorganic expansion, it realised that waiting for two years would have come at a high cost.
Struck by the pandemic, the already financially stressed company is expecting its loss to almost double to Rs 5,900 crore in FY 21. ‘’The monthly requirement to keep business as it is will require Rs 500 crore. Adding other costs, it will require almost Rs 12,000 crore in the next two years. This is not sustainable,” one of the officials quoted above said.
