They're learning to fly again, on broken wings. At 6.05 a.m. on June 22, Air Sahara President Alok Sharma was at Delhi's Palam airport supervising the take-off of its first flight of the day. Hours before, the airline had faced the biggest no-show of its career: Naresh Goyal, Chairman of Jet Airways, who had agreed to pilot Sahara into a new future in January, had refused to extend the purchase agreement for the airline beyond June 21. Indian aviation's biggest deal had collapsed.
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|CO-PILOTS NO MORE: Sahara's Subrata Roy and Jet's Naresh Goyal (right) |
The deal never really took-off, like an engagement that's called off before the wedding, and in this case, despite the two families-Jet and Sahara-being keen on the marriage. Perhaps too keen. The engagement conducted in haste has now ended in repentance at leisure for at least one of the two airlines.
THE $500 MILLION MISTAKE?
Though Ernst & Young had valued Sahara at $550 million in 2005, Jet's price of $500 million for the airline has come under scrutiny. Here's a rough check list of what Naresh Goyal might have perceived as Sahara's key assets and risks in taking control of them.
What Goyal saw in Air Sahara
AIRCRAFT: Sahara had a fleet of 27 planes which, added to Jet's 53, took the combined fleet to 80, the highest in India (Indian has 70). But all Sahara aircraft were leased, not owned, and weren't in good shape for Jet.
Value for Jet: Low
Risk: Poor fleet quality
MARKET SHARE: Sahara had an 11.6 per cent market share in January (it dipped to 8.5 per cent in April)-highest among Jet's competitors in the private sector. Jet's share was 34 per cent. Jet would have at least liked to retain the share.
Value for Jet: High
Risk: Sustaining the share
BRAND: Though Jet is the best domestic airline, Sahara too had captured a substantial mind-share of air passengers over the years. But Goyal was clear he would phase out Air Sahara gradually and the merged entity would be Jet.
Value for Jet: Negligible
Risk: Negative perception
STAFF: Sahara's workforce of 2,000 could have been an asset in times of acute shortage of trained manpower. But Jet (employee base 8,000) found the work culture and ethos of the two companies to be totally different.
Value for Jet: Low
Risk: Integration of culture
LANDING & PARKING SLOTS: Given the shortage of airport infrastructure, these were valuable for Jet. It gambled on acquiring these though there was no clear policy. The May 4 policy granted parking and landing slots to Jet.
Value for Jet: High
Risk: Policy vacuum
AIRPORT INFRASTRUCTURE: Jet was also eyeing Sahara's hangars, check-in counters, passenger lounges, etc. It claims the May 4 policy did not explicitly grant this to Jet. The policy is clear on transfer. (See box "Deal Breakers")
Value for Jet: High
Risk: Policy vacuum
INTERNATIONAL ROUTES: Jet and Sahara are the only two private domestic airlines eligible to fly abroad. That makes Sahara's rights highly coveted. Jet says the Government hadn't clarified if it could use Sahara's global routes.
Value for Jet: High
Risk: Government clearance
BOTTOMLINE: While valuing Sahara, Goyal had placed a much higher premium on infrastructure and routes-assets he was not even certain he would get at the time of signing the deal-than on aircraft and manpower. Is that a lesson in valuation?
All assessments are based on analysts' comments and documents
Risks were at the time of Sahara takeover
Yet, it's not the failure of the Jet-Sahara merger, but the reasons for its failure that are more ironical. Two businessmen, best known for managing the policy environment and influencing people in high places, are now blaming the Government and its policy for the crashed deal.
Despite the high drama over the delayed security clearance of Goyal's name for his induction into the reconstituted board of Air Sahara-the approval came just a day after the extended deadline for merger expired on June 21-sources in Jet claim that was not the reason they called off the deal. Jet, they say, could have formed the new Sahara board with four names that were approved by the Government on May 29-Javed Akhtar, Victoriano P. Dunca, Vijay Kelkar and Saroj Dutta. But the Air Sahara they would have got wasn't the airline they had bargained for.
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|"Policy cannot be tailor-made to suit any particular airline.": PRAFUL PATEL CIVIL AVIATION MINISTER |
Jet calls them compulsions. Sahara and the ministry call them excuses.
Fact: Naresh Goyal's security clearance from the Home Ministry came a day after the June 21 deadline for the share purchase agreement.
Contentions: Jet blames the Government for acting slowly. Sahara finds the timing of clearance very convenient for Jet, which it says was itching to get out of the deal. The Home Ministry says it is not answerable for the pace of its investigations. Besides, the new board could have been formed without Goyal who could have joined later. Sahara had even requested the Civil Aviation Ministry to clear the four-member board. In reply, the ministry said it required Jet to make an official request. Jet did not oblige.
Fact: Jet needed Government clearance before taking control of Sahara's airport infrastructure. The clearance came in a May 4 policy.
Contentions: Jet claims the policy isn't clear on the transfer of facilities like hangars, check-in counters and passenger lounges, and is also silent on the status of Sahara's international routes. The Civil Aviation Ministry calls Jet's charges absurd and quotes one critical statement from the policy: "...the user rights over such infrastructure that are given to an airline on non-payment basis e.g. parking bays, landing slots etc. may be allowed to be used by the airline that takes over the aircraft. For all other rights, the terms of lease/sale agreement between the airport operator and the airline may apply." This, the ministry says, clarifies that Sahara's facilities were to be handed over to Jet.
For Jet, Sahara's two most lucrative assets were its airline infrastructure and rights to fly on international routes-especially Singapore and London. When Jet signed the $500 million deal on January 18 with Sahara, the country had no mergers and acquisitions policy specifying the terms of transfer of airport infrastructure. After all, this was the first major airline consolidation in Indian aviation. Earlier acquisitions, such as NEPC's takeover of Damania in the mid-1990s, had happened in an era when infrastructure was in surfeit, not in shortage like it is today. Jet-and Sahara-had assumed that once the deal was sealed, airport facilities belonging to the latter would automatically be transferred to the buyer. But the Government, anticipating more mergers and acquisitions in the future, which would lead to competing claims on limited infrastructure, decided to frame a comprehensive policy.
To begin with, no policy was announced till March 23, when the share purchase agreement (spa) between Jet and Sahara expired. The deal was extended by 90 days through mutual consent. When the policy was finally drafted on May 4, Jet claims it didn't clarify all its concerns. According to Jet, the policy is clear on parking bays and landing slots, but does not specify the status of aircraft hangars, check-in counters, cargo warehouses, passenger lounges and other such airport facilities. The policy, available on the Ministry of Civil Aviation's website, makes a distinction between intangible airport infrastructure like parking bays and tangible ones like hangars and check-in counters. It specifies the transfer of intangible assets. But for the tangibles it says the "terms of lease/sale agreement between the airport operator and the airline will apply".
This As the two airlines take the battle to the courts, experts analyse what is likely to unfold in the market place in the next few months
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|ECONOMY WINS |
Bush's support for outsourcing helped him override traditional Indian backing for Democrats
Get into the mindset of running an airline-again.
Redraw domestic and international schedules.
Compete hard to stem the fall in market share.
Renegotiate contracts with suppliers and travel agents.
Arrange finance for the 10 new aircraft that have been ordered.
Rebuild team, get employees back.
Look for a buyer or partner to prevent bankruptcy.
Offload the seven grounded CRJs which are unserviceable.
Withdraw the equipment and personnel loaned to Sahara.
Execute the terms and conditions of disengagement laid down in the agreement.
Look for a mutually agreeable arbitrator, normally a high court judge.
Deal with Sahara's damage claims.
Be ready to foot heavy bills of lawyers.
No major impact, competition in this sector can only increase.
Any new buyer for Sahara will have access to adequate funds.
If Sahara goes bankrupt, fliers will not run out of options given the proliferation of new airlines.
Low-cost airlines to become stronger-they have already grabbed the market share that Sahara lost.
Jet says it didn't find the language lucid enough to determine if this meant it had rights over Sahara's tangible airport infrastructure-an argument the ministry refuses to accept. "Do they need to be taught the Queen's English to interpret these guidelines?" asks a top official of the ministry angrily. In a letter to the ministry on May 22, Jet sought clarifications. According to ministry sources, both Jet and Sahara had wanted the new policy explained. Ministry officials highlighted the relevant portions and handed it back. The airlines were told that except for parking bays and landing slots, everything else was a tangible asset and could be transferred as per the airline's lease agreement with the airport authorities. But Jet was hoping for a written clarification. It never came. "The policy cannot be customised to suit any particular airline-it's made for the country, not for a company," says Praful Patel, Minister for Civil Aviation. That's a strong statement from a ministry rumoured to be close to Goyal.
The other big deal breaker was the confusion surrounding the transfer of Sahara's international routes. Even though Jet's entry into the US is mired in controversy, it claims it wasn't even allowed to operate on Sahara's lucrative Singapore and London routes. The ministry is yet to clarify this point. If Jet was indeed denied Sahara's global flying rights, that's a big blow because, according to most analysts, one of the key benefits of the buyout was that Jet would have been the only private Indian airline to fly abroad (barring West Asia) with no competition for the next three years.
As for airport infrastructure, acquiring it was important for Jet. But more important than the actual acquisition, was the strategic importance of scuttling competitors' chances of catching up. At a time when Jet was losing market share to a growing army of low-cost carriers, that held special appeal (See "King Of Air", India Today February 6, 2006). Of course, this is assuming that Jet was genuinely convinced it wouldn't get Sahara's airport facilities even after the ministry's verbal clarification; and the airline wasn't just looking for excuses to wriggle out of the deal.
To figure out exactly why and when Jet started feeling edgy about the benefits of a takeover it had so triumphantly announced, let's step back to March. The original purchase agreement was valid only till March 23, implying that security clearances for the new Air Sahara board with five Jet members and approvals for transfer of assets and facilities would come through before that. As part of an integration team, Jet officials had already moved into Air Sahara and were beginning to take decisions such as the cancellation of Sahara's
Bid-&-Win scheme. Jet had shelled out Rs 180 crore in two installments towards the operating costs of running Air Sahara during the months of February and March. Sahara had paid an equal amount for the months of April and May. This was in addition to the Rs 2,000 crore that Jet had deposited in an escrow account. No other advance payment or earnest money was paid, or was required to be paid. With no approval or clearance forthcoming till March 23, Jet and Sahara extended the purchase agreement by another 90 days to June 21.
On March 23, something else also happened. According to sources, Jet paid an advance of Rs 500 crore to Sahara. The advance was against the pledge of Air Sahara shares. The payment and the pledge are still with the two parties, and could come handy when, and if, they decide on an out-of-court settlement.
By April, some route changes were implemented to optimise the combined fleet of the two airlines. Ever since the proposed merger, Sahara had been losing people steadily, including those at the senior management level. Worse, its market share too had started slipping. One conclusion could be that Jet's influence was weakening the airline. "You could say the brand was allowed to fall," says the Sahara president. But Jet would insist Sahara had weakened itself prior to the takeover, just to what extent even Jet couldn't tell. Sahara's fleet of seven CRJS (small aircraft) was grounded because of maintenance problems. Jet also alleges that there were pending bills against Sahara aircraft that had been taken on lease and several of them were not even air-worthy. True as that may be, Sahara is not entirely to blame. Jet should have done a better due diligence before making the offer to confirm whether Sahara's aircraft fleet was indeed as valuable as it originally believed it to be (See box "The $500 Million Mistake?").
Judging by the sequence of events, Jet hadn't written off Sahara till the first week of May. On May 4, it inked a consultancy agreement "to assist the Sahara airlines management in improving its overall performance and customer service". Under this agreement, 11 senior executives of Jet across different functions were entrusted with the responsibility of guiding Air Sahara. That was also the day when the Civil Aviation Ministry released its policy on the use of airport infrastructure in case of mergers and takeovers-the document that was cited by Jet as the key reason for calling off the deal.
It is said that the Sahara deal dragged down Jet's share price and, therefore, its market value and the ability to raise funds. This, at best, is only partially true. Even in October 2005, Jet's share was being quoted below Rs 1,000 (IPO price Rs 1,100). Sure, the takeover didn't help push up the share price (though the share moved up marginally a day after the takeover announcement), but it didn't hurt either.
The big fall in the share price came on January 25 when Jet announced its third quarter results for 2005-06. The bearish markets saw Jet's share price plummet to its lowest closing value of Rs 604 on June 8. Though the share recovered slightly after the Sahara deal was called off, by June 26 the price had again dipped below Rs 650. There is an intriguing market buzz about Jet's takeover and its subsequent walkout. It's rumoured that post-IPO, a lacklustre performance of Jet's share prompted the head of a big financial institution close to Goyal to recommend buying Sahara. The logic: it would be one way to quickly boost both market share and share price. A higher share price, the argument went, would then help Jet raise convertible bonds on easier terms. When the buyout failed to prop up the price, the same adviser suggested the deal be called off.
Some believe there is a political twist to the tale, too. Jet's proximity to the current Government is well known, as is Sahara's Subrata Roy's connections with the Samajwadi Party honchos, Mulayam Singh Yadav and Amar Singh. NCP's Sharad Pawar and Praful Patel are Goyal's close friends, as are Congressmen like former civil aviation minister Ghulam Nabi Azad.
Some see the deal as part of a Congress-sponsored vendetta against the Samajwadi Party and claim that Goyal's withdrawal had the ruling party's blessings as it did not want the Sahara Group-or the Samajwadi Party-to be bailed out. The security clearance was held back for the crucial deal-breaking 24 hours. Dismissing these conjectures, the Home Ministry maintains it will not be used as "a scapegoat to dish out excuses on behalf of either Jet or Sahara. We don't owe explanations for the time limit of our investigations".
That, if true, may prove very convenient for Jet, and equally inconvenient for Sahara. The latter alleges it lost 2,000 passengers daily-down from 15,100 a day to 13,000-in six months as several of its flights were rescheduled by Jet. Flights operating on 100 of the 134 Sahara routes have now been resumed and old employees are being wooed back. The airline claims it is not looking for an alternative buyer and will instead go in for aggressive re-branding. "Brand Sahara is back. No more deals," announced Sharma.
In December last year, Air Sahara had placed an order for 10 new Boeing 737-800s. Delivery of the first two aircraft is due in September this year.
The airline has walked off with least of the blame and most of the sympathies for the breakup. The role of the villain in the drama is shared between Jet and Patel who, incidentally, is rated as one of the most efficient ministers in the UPA Government. The tag is believed to be earning him envy and enemies in political circles.
Has Indian aviation been affected by the aborted takeover? "The massive market potential for new fliers is not going away because of any deal," says Ajay Singh, director of Spice Jet. But industry experts are forecasting turbulent weather for the two airlines as they prepare to take on each other and the rising army of low-cost carriers that have been chipping away at their market share.
-with Puja Mehra