Structuring Air India sale critical to get a good value
While it is always possible the government may be tempted to push some populist measures in what is its last budget before next year’s general elections, the signs so far are encouraging. Though no move was made on liberalising rules for FDI in either multi-brand or food retail, significant changes were made for single-brand retail including 100% FDI through automatic approval and more relaxed local-sourcing norms. Other decisions on FDI in townships also fall in this category. The fact that the prime minister is going to Davos with a big contingent also suggests that some more reform may be in the offing. The finance minister has, in any case, said the banking recapitalisation will be accompanied by sweeping reforms.
The single-biggest change, of course, was that relating to the loss-making Air India and foreign airlines will be allowed to buy up to 49% in it—foreign airlines are allowed to buy up to 49% in other airlines, but this was not allowed for Air India till Wednesday’s Cabinet decision; with this in place, the number of serious bidders has increased and even a group like the Tatas will now find it easier to bid along with its foreign partner Singapore Airlines. While no details have been made public, it is likely the government will create ‘good’ Air India with only the aircraft-related debt (`18,000 crore) and a ‘bad’ Air India with the rest (around Rs 32,000 crore) of the debt and its real estate/art and the residual equity that is not sold to the potential bidder which could be a foreign or an Indian airline.
This structuring is critical since, no matter whom the bidder is, Air India’s real value will emerge only after its operations turn around—indeed, if Air India is sold without restructuring the debt, it is worth nothing. Certainly, the initial structuring to take out a large chunk of the debt will help, but it is only when the new owner turns it around that the EV/ebitda will rise to industry levels (IndiGo is valued at 12.7 right now). In which case, the best sell-off plan may be to structure the deal in two phases with, say, 51% of the airline being sold in the first phase—if there is a foreign airline involved, it can buy up to 49% and an Indian partner the rest. This 51% will give the new owner full control and the government needs to, in the sale contract, commit to not use the remaining shares to block any resolutions by the new management. And, after a maximum of, say, five years promise to offload the rest of the shares—in the case of Maruti, after the initial sale that gave full control to Suzuki, the government divested its stock over five years. The value of this 49% stake along with various properties owned by Air India as well as its art may then lower the hit the government has to take in its effort to sell off the airline. Structuring the sale in such a way is also important since it will, for instance, help the government avoid the charge that expensive real estate has been sold for a song—as it happens, a lot of the real estate like the iconic Nariman Point building does not even belong to Air India but is on lease. As for the fanciful numbers put out by Opposition MPs, the government would do well to put them in perspective. While Manish Tewari of the Congress said Air India was worth Rs 5 lakh crore, the world’s most valuable airline, Southwest Airline is worth Rs 2.5 lakh crore and that’s when it has been making money for 44 years in a row—its latest profit was Rs 4,300 crore.