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Corporate Sep 19, 2012

Can Jet, already 80% owned from Isle of Man, seek FDI?

By Sindhu Bhattacharya

New Delhi: Is Jet Airways really qualified to invite equity participation from Etihad, or any other foreign carrier, for that matter, given its current shareholding structure?

Stories in The Economic Times and Business Standard this morning speak of Jet Chairman Naresh Goyal and his top team camping in Abu Dhabi to strike a possible equity participation deal with Etihad. On Friday, the government lifted the cap on foreign airline investment and is planning to permit up to 49 percent investment by a foreign carrier in domestic airlines, subject to certain conditions.

Jet is already 80 percent owned through a vehicle abroad. Reuters

The BS story clarifies that though Goyal himself is a non-resident Indian (NRI), Jet is an Indian company and is, therefore, entitled to seek a strategic foreign partner. It is widely known that Goyal holds an overwhelming 80 percent equity in the airline through a company called Tail Winds, which is registered in the Isle of Man.

So, in effect, Jet is already 80 percent owned through a vehicle abroad. Till the new norms removing the cap on foreign companies buying into Indian carriers get notified, Jet continues to operate in violation of the current FDI guidelines which cap investment by foreign institutions (excluding airlines) at 49 percent.

There could, however, be one way through which Naresh Goyal may succeed in getting Etihad, or any other foreign carrier, to buy into his airline - by issuing fresh shares and diluting his own shareholding in Tail Winds. An industry veteran pointed out that if Goyal gets the correct valuation for his company, this route could be taken to remain within the 49 percent cap for foreign airline investment.

Jet's multiple attempts to raise money abroad through the Qualified Institutional Placement (QIP) route have been rejected by the Foreign Investment Promotion Board in the past precisely because of the breach of current FDI policy. How then will the airline be able to structure a deal with Etihad or any other foreign carrier?

An aviation expert pointed out that Goyal may offload some of his stake in Tail Winds to a foreign carrier to carry forward any such deal. But then, how will Goyal convert the remaining equity, routed through Tail Winds, into shares owned by Indians?

Not many people may be aware of the deep friendship and trust which has existed between Goyal and the Etihad management, much before any talk of equity partnership surfaced. But is Goyal engaging Etihad because it wants to deflect the Abu Dhabi-based airline's attention away from other potential acquisition targets like SpiceJet and Kingfisher Airlines?

Industry experts have pointed out earlier that Etihad had signed a letter of intent with Kingfisher much before the government opened foreign airline investment, which made the intention of Etihad to consider a partnership with Kingfisher clear. Apparently, Etihad and Qatar Airways are two airlines which want a firm hold in the Indian skies to thwart the more powerful Emirates, which is currently the largest airline operating to and from India.

Industry insiders also aver that Jet may just be keen to forge a specific code share agreement with Etihad instead of angling for a full-fledged equity deal.

Another industry source pointed out that Jet's ambition of entering the powerful global airline grouping, Star Alliance, may not fructify if it went ahead and struck an equity partnership with Etihad. The cold vibes between Gulf-based carriers and Star Alliance (which is a 27 airline grouping) has been well known. This source said that though, legally, Star Alliance members cannot prevent Jet from forging such a deal, this may make Jet's entry into Star Alliance quite tough.

Apart from pushing the government to help it enter the Alliance, Jet is also reported to be talks with Lufthansa for a code share partnership. Will seeking equity investment from Etihad mean Jet will have to rethink these moves?

Then, even if Etihad wants to buy into Jet, why will it agree to a higher valuation? The ET report says Jet wants Etihad to value it at $800 million (around Rs 4,300 crore) but Etihad wants to pay half that amount, since the market value of Jet shares is currently around Rs 3,100 crore.

Last year, Jet's losses stood at Rs 1,236 crore despite many financial engineering deals involving sale-and-leaseback of aircraft. Worse, it has ceded market leadership to IndiGo. In August, IndiGo had a market share of 27.6 percent against the combined market share of 25.2 percent for Jet and its low-cost carrier JetLite.

So from the looks of it, a deal between Jet and Etihad may still be some distance away.

by Sindhu Bhattacharya

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