Merger politics

SMARTSHARE

When rich nations established open financial systems and easy takeover codes in the 1970s, they implicitly assumed global business would remain a club for whites and "honorary whites". (Japanese and Arabs were actually defined as honorary whites under apartheid).

When the First World pressured Second and Third World nations into creating similar open systems, they further assumed that the flows of profits and capital would forever remain in favour of the first world.

It's hilarious to watch the wriggling, post-Arcelor.

The Indian government's reaction is inconsistent. Why should India threaten to review double-taxation treaties with Luxembourg to signal moral support for a takeover bid made by a British citizen? And why does it not allow that gent to enter several business sectors in his own country of origin?

The outcome will be a landmark in EU history and it may force greater clarity in European business mores. If enough people point out the inconsistency in the Indian stance, India itself may feel under pressure to allow foreign capital to enter various reserved sectors. That would be a good thing, reciprocated or not.

Anyway, the situation will resolve itself. The irony is that given the relative speed of policy-making and jurisprudence in India and the EU, the contentious "hostile offer" may be resolved as quickly as the smooth Air Sahara- Jet Airways merger.

The merger has yet to be cleared by the DGCA, which is a process that could take a minimum of three months. Once cleared, it will have to be funded.

The funding should be in place by then since a decision on how the capital will be raised will probably be taken by Jet's shareholders on February 28. On that date, we'll also have a clearer picture on the valuations for the merger for there is a woeful lack of balance-sheet detail about Sahara's financials so far.

But the DGCA could hold up the merger or put several spokes in the wheel. Other airline operators have suggested that Air Sahara's parking bay and route rights should be distributed out across the industry rather than taken over directly by Jet.

It is rumoured that Sahara employees are unhappy at the standard concept of being re-interviewed by the new management; someone might be creative enough to make a legal case out of this.

Given the parlous state of aviation infrastructure, Jet's willingness to shell out the equivalent of $500 million for Sahara would certainly have been prompted by those physical factors.

There is an acute shortage of bays and of ticketing counters inside airports. For that matter, there is an acute shortage of parking slots for airline cars and buses. Add route rights, which are important even in ideal infrastructure environments.

Once the merger is through, the new entity would hold nearly 50 per cent marketshare (Jet has 36-37 per cent and Sahara, 12 per cent) and it would also be the only private airline cleared to fly internationally for the next 2-3 years. With a combined fleet of 80-odd aircraft, the merged entity would have global economies of scale.

Jet is a non-discount, business-traveller-centric airline. Sahara has a more non-metro, downmarket branding. These brands might complement each other with a foot in both segments. The merged entity may have lower operational costs due to synergies.

Would it be a good buy? I'm prejudiced against the airlines business. But given traffic projections, both domestic and foreign, the merged entity would have a better chance of survival than its competitors. Provided the DGCA is sensible.