The government has changed a bidding parameter for state-owned airline Air India, allowing potential buyers to quote enterprise value instead of equity value. Simultaneously, the deadline for submitting bids has been extended to December 14 from October 30.
The decisions were taken by Home Minister Amit Shah-led group of ministers on Thursday.
Civil Aviation Minister Hardeep Singh Puri said this would entice bidders who till now had constructed the debt amount as a minimum threshold bid amount. The Tata group, which operates two airlines Vistara and AirAsia India, is a favourite for acquiring the national carrier.
“We expect to complete the bidding process by end of December,” Puri said.
Enterprise value of a company includes the equity value, debt as well as cash with the company. Equity value measures the value of a company’s shares.
However, the government has mandated that a willing bidder will have to pay 15 per cent of his quote as upfront cash payment, disinvestment secretary Tuhin Kanta Pandey said.
According to the current sale terms, the buyer is required to take over debt of around Rs 23,286 crore. The debt is mainly on account of aircraft purchase, which is backed by sovereign guarantees. Those guarantees will be withdrawn when the airline moves to private ownership.
“After multiple discussions with all stakeholders which includes prospective bidders, we decided to unshackle the process. Under this changed bidding parameter, there is no pre-decided debt level but we will allow the market to discover a price,” Pandey said.
“We are doing it because it is a very uncertain environment,” he said.
Pandey added that while the relaxed condition of allowing bidding by enterprise value will open the prospect for more players, the condition that 15 per cent of the payment has to be made upfront by cash will ensure that only financially sound companies
with skin in the game participate. The International Air Transport Association (IATA) has downgraded its traffic forecast for 2020 to reflect a weaker-than-expected recovery of air travel demand.
While the government considered the warning of transaction advisor EY that in the absence of recovery, prospective suitors may not be willing to go for an inorganic expansion, it found that waiting for two years will cost more than what it can recover from the sale. The already financially stressed company is expecting its loss to almost double to Rs 8,000 crore in FY 21 due to the pandemic.
According to Air India
Chairman and Managing Director Rajiv Bansal, the company’s debt at the end of last fiscal stood at Rs 60,000 crore. “The monthly requirement to keep business as it is will require Rs 500 crore. Adding other costs, it will require almost Rs 12,000 crore in the next two years,” a government official said.