The government has changed the parameter for the sale of state-owned carrier Air India, allowing bidders to quote enterprise value instead of equity value.
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.
The government extended the deadline for bidding to December 14 from October 30. The decisions were taken by the group of ministers headed by home minister Amit Shah on Thursday.
Civil Aviation Minister Hardeep Singh Puri on Thursday said enterprise value will 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 among favourites to acquire the company.
“We expect to complete the bidding process by end of December,” Puri said.
However, the government has mandated that a willing bidder will have to pay 15 per cent of his quote as 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debt is mainly on account of aircraft purchase, which are backed by sovereign guarantees but those guarantees will be withdrawn when the airline moves to private ownership.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. We are doing it because it is a very uncertain environment,” Pandey said.
Pandey added that while the relaxed bidding condition of allowing bidding by enterprise value will open the prospect of more bidders, the condition that 15 percent of the payment has to be made upfront by cash will ensure that only a company which is financially sound and has skin in the game.
The International Air Transport Association (IATA) has downgraded its traffic forecast for 2020 to reflect a weaker-than-expected recovery of air travel demand. IATA fears that a complete recovery of international air travel may take at least two years.
While the government contemplated 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 money, than it can recover from the sale.
Struck by the pandemic, the financially stressed company is expecting its loss to almost double to Rs 8,000 crore in FY 21.
According to Chairman and Managing Director of the airline, Rajiv Bansal, the company’s debt at the end of last financial stood at Rs 60,000 crore.
“The monthly requirement to keep business as it is will require Rs 500 crore which means adding other costs, it will require almost Rs 12,000 crore in the next two years. This is not sustainable,” a government official said.
Civil aviation minister Puri drawing comparison with Jet Airways said, Air India’s prospects of getting a suitor is brighter as it was an operating airline with current slots and bilateral rights.
“What is being privatized is a running airline as against some other entity which is like a garage sale,” Puri said.
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