Kingfisher merger will help rope in investors

Mallya riding on Deccan

The merger of Kingfisher Airlines into Deccan Aviation will help Mallya rope in investors to infuse the much-needed cash to fund the international foray and sustain operations of the two airlines, according to industry experts tracking the deal.

''Mallya will get different types of investors "" large hedge funds or West Asian institutions "" who were hitherto not comfortable with the competitive intensity here. That's reduced now,'' said a senior executive of a private equity firm, which has invested in an Indian carrier.

''These investors will come round to the view that Deccan is the second best airline they can bet on and with time the losses will get wiped out.''

The two airlines have accumulated losses of Rs 1,100 crore ($275 million). Investors will have to factor in the losses for the next two quarters also.

''The two airlines will need $200-300 million for the next 18-24 months,'' UB Group CFO Ravi Nedungadi estimated.

Analysts believe that Kingfisher will find it easier to raise money as a merged entity as it now offers two airlines.

''Investors are always willing to back the sector. It's a specialised sector. These are investors who made money, understand the sector and are betting more on the macro-economic factors,'' said the executive of a private equity firm.

These are specialist airline investors such as Indigo Partners and private equity firms Capital International, Texas Pacific Group, Temasek and Istithmar, which has invested in budget carrier Spicejet twice.

''But the money will come in with terms and conditions related to the strength of the balance sheet. The funding can be structured in many ways "" it could come as equity, lease finance, optionally convertible debentures,'' the executive said.

''The best thing is that the merged entity won't have to pay taxes for a long time,'' said an analyst at a brokerage. The fact that Deccan's shares have doubled in value in anticipation of the merger is an indication of investor interest.

''Investors are not putting their money on Deccan, but on Vijay Mallya. It will be a show of trust in his business acumen. He will have no difficulty finding willing investors,'' said Jet Airways' former CEO Steve Forte.

The consolidation in the market will encourage investors. ''Fares have gone up and will continue to do so as long as fewer competitors serve the market,'' said Forte.

Fares have gone up because it's the peak season when fares typically go up 30-40 per cent, but airlines say that there's a slowdown in capacity addition.