If uncertainty is a threat to stock valuations, then an amicable resolution to the Jet Airways-Air Sahara wrangle should mean fewer air pockets for the Jet Airways stock in the days ahead.
But in reality things may not work out quite so simply for investors in India's premier private sector airline. Even after the final value of the deal has been announced, there remain grey areas on the basis and actual quantum of the acquisition price. What is more, the changed dynamics of the aviation sector call for a fresh look at the benefits from this deal for Jet Airways.
Lower valuation
According to its stock exchange announcement, Jet Airways is shelling out Rs 1,450 crore (a part of it in staggered payments) for acquiring the entire equity capital of Air Sahara.
If this is the total sale consideration, it represents a hefty 34 per cent discount to the original acquisition price of Rs 2,217 crore agreed to by the two companies in January 2006.
Market estimates suggest that Jet Airways has bagged its rival at less than one time its annual sales, which certainly appears a moderate valuation, going by the yardstick usually applied in mergers and acquisitions.
However, the downward revision in the acquisition price does not automatically make Air Sahara a "bargain" for Jet Airways as the former's fortunes have also taken a turn for the worse. The past year has seen significant slippage in the market share and fortunes of the full-service carriers, with low-cost airlines making significant inroads into the domestic aviation market.
Air Sahara, with its weaker financials and aggressive pricing, appears to have borne the brunt of the competitive onslaught. Its market share, at the 12 per cent mark a couple of years ago, has slipped to 8 per cent today.
Moreover, aggressive pricing by the carrier to compete with low-cost competitors has diluted somewhat its image as a premium airline. Given the competitive intensity and the shortage of skilled staff, the airline's staff strength is also likely to be lower today than it was a year ago.
The loss of market share would in itself call for some revision in the buyout price for Air Sahara in relation to the original terms.
In addition, the viability of the low-cost model is now more firmly established than it was a year ago. Low-cost carriers such as Air Deccan are now on a better financial footing and control nearly a third of the market (from 25 per cent about a year ago).
With full-service carriers forced to offer a larger proportion of their seats at discounted fares, and gyrating ATF (aviation turbine fuel) prices putting pressure on profit margins, Jet's own profitability parameters have been dented in the past year.
It is precisely these factors that have led to a sharp decline in the stock market valuations for Jet Airways over this period. Between January 2006 (when the original buyout bid was made) and now, the market capitalisation of Jet Airways has shrunk from Rs 9,200 crore to Rs 5,400 crore — a 41 per cent drop.
This is despite the company's annual revenues rising 29 per cent over the past 12 months. If stock market prices were the benchmark for valuation, the value of Air Sahara deserves to be marked down by at least a similar degree.
Questions that remain
There are other unanswered questions relating to the acquisition price of Rs 1,450 crore. If this represents the value of equity alone, what is the status of the debt on Air Sahara's balance-sheet?
Under the original (January 2006) terms of the buyout, the liabilities of Air Sahara were not to be transferred to Jet Airways. Do these terms still hold good?
Second, Jet Airways is said to have infused some cash into Air Sahara to meet its operational expenses during its initial negotiations. How is this factored into the acquisition price?
Finally, Jet is also said to have allowed Air Sahara to retain a portion of its assets, such as the brand name and the helicopter fleet. What is the valuation of these assets?
In return for a lower price, Jet Airways also appears to have made a few compromises on the intangibles relating to the terms of the deal. Reports suggest that it has agreed to take over Air Sahara's fleet on as-is-where-is condition.
This means that Air Sahara's entire fleet of 27 planes will now accrue to Jet Airways. The latter's fleet that was slated to go up to 89 aircraft only by 2009 will now be scaled up almost immediately.
Jet has also decided to retain the entire staff of the acquired operations, as opposed to its earlier plan of absorbing only the pilots and technical staff.
These changes may have a crucial bearing on the time taken and the challenges involved in the integration of Air Sahara's operations with that of Jet Airways, a task difficult enough to begin with.
No doubt some of Air Sahara's assets — its fleet, landing and parking rights at key airports and experienced staff — can strengthen Jet's operations at a time when competition, both from low-cost carriers and Indian, is set to intensify. However, there are also weak spots in the former's operations.
Jet Airways has for long been admired by industry players for its efficiency — low turnaround time, cost-efficient operations, relatively young fleet and best-in-class service.
The challenge for the company would now lie in bringing Air Sahara's operations on a par with it on these parameters. Seen in this light, Jet Airways may only have won a battle in bagging Air Sahara at a "bargain" price. The war is yet to be fought.