IndiGo eligible to go solo in Air India bid, may meet net worth condition

Budget carrier IndiGo will be able to bid solo for Air India’s 76% stake, while other domestic airlines will have to form a consortium to meet the net worth criteria stipulated by the government. 

The airlines bidding as part of a consortium will also be restricted to owning 51% in the partnership. This means such an airline will effectively hold 38.76% in Air India as the government will be retaining a 24% stake in the airline.

The information memorandum for the sale of a 76% stake in Air India stipulates that bidders must have a minimum net worth of Rs 50 billion, and net profit for three preceding years. However, the rule has been relaxed for Indian carriers to enable them to participate in the process.

Interglobe Aviation, the company that runs IndiGo, had a net worth of Rs 38 billion as of March 2017 and Rs 62 billion as of September 2017, while other domestic airlines have a negative net worth due to accumulated losses. Thus, IndiGo will be able to participate in the bidding alone, while other domestic airlines will have to tie up with partners. 

A domestic airline that is part of a consortium does not need to fulfil the three-year profitability criteria. Similarly, a domestic airline with a negative net worth can also apply as part of a consortium, provided its stake is restricted to 51%.

IndiGo, which was the first airline to express interest in acquiring Air India, will, however, have to meet certain conditions to make a solo bid. These will include submission of audited financial accounts of 2017-18 along with expression of interest (EoI) by May 14.

The information memorandum states the net worth and profit after tax figures will be taken from the 12-month audited accounts and shall not be based on partial periods.

Consultancy firm EY is the transaction advisor to the government for the deal. IndiGo did not respond to a specific query on the issue. Last week, it had denied reports of a tie-up with Qatar Airways for acquiring Air India.

Tata Sons, which is said to be preparing a bid along with Singapore Airlines, too, declined to comment.

While potential suitors are evaluating the bid criteria and discussing the next step, the sale offer has raised concerns with regard to the amount of debt to be held in the airline and restricted timelines for the submission of EoIs. On the other hand, Air India’s slots at prime airports, traffic rights and its pool of talented manpower are the key attractions for airlines keen to expand in India. 

One of the concerns is that the consortium shareholding has to be frozen at the time of submission of EoI, which is May 14. Experts point out no global airline board will commit to a shareholding without a detailed analysis of accounts and due diligence. However, the bid conditions say access to the ‘data room’ to review documents will be granted only to qualified bidders before making financial bids.

The timeline for the transaction is also being seen as restrictive. “The government will provide clarifications by April 30, and bidders are supposed to finalise the consortium shareholding, all legal clearances and paperwork by May 14. There has to be at least 45 days between the issue of clarifications by the government and expression of interest submission,” an aviation source pointed out.

However, a person involved in the transaction dismissed the concerns. “Potential bidders have time from now till May 14. The process does not start on April 30 and bidders have sufficient time and information to assess the offer. In a merger and acquisition transaction, access to documents is not given to any suitor without prior screening and check of credentials,” he said.

“The government is encouraging domestic airlines to bid for Air India and hence has relaxed the net worth and profitability criteria. However, shareholding of Indian carriers not fulfilling the net worth criterion has been capped at 51% in a consortium because the government does not want a scenario where a financially weak or an airline without any capability ends up owning 80-90% in a consortium,” the person said.  

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