Air India reserve price likely to be fixed at Rs 15,000-20,000 crore

A lower bid amount may not halt the disinvestment process

The government has considered the future cash flow projection of Air India, its brand value and intangible assets like bilateral rights and slots in foreign airports to set the reserve price for the airline. Sources indicated that the reserve price would be in the range of Rs 15,000-20,000 crore.

The government expects the final bid to at least match the reserve price. But, it may still go ahead with the disinvestment process even if the bid quoted is lower than the reserve price.

Valuation firm RBSA Advisors and EY- the consultant for the disinvestment - gave a presentation to the committee of secretaries headed by the cabinet secretary on Tuesday, a person in the know said.

Following the presentation, the committee headed by cabinet secretary Rajiv Gauba on Wednesday met to finalise the reserve price, which will then be used as a benchmark to compare the financial bids. Salt-to-software conglomerate Tata Sons is the favourite to win the bid.  

Tatas have done extensive due diligence involving three teams from Air Asia India, Tata Consultancy Services and external consultants Seabury, Bain, Alvarez & Marsal and law firm AZB & Partners. The group has also formed a separate company Talace Private Limited to participate in the Air India process.

The government has changed a bidding parameter for state-owned airline Air India, allowing potential buyers to quote enterprise value instead of equity value. However, the government has mandated that a willing bidder will have to pay 15 per cent of his quote as upfront cash payment.

“Air India’s current earnings were not the benchmark for the valuation exercise as the company’s abilities are not being used in full. The future earning potential of the airline and financial forecast has been provided after considering full utilization of all assets of the company including current unused slots, frequent flyers and bilateral rights,” said a person involved in the process.

A separate valuation exercise was undertaken for intangible assets like brand value, bilateral rights and domestic slots of the airline. “Unlike many international airports like Heathrow where slots are traded and a benchmark value can be obtained, India doesn’t permit slot trading. So, benchmarks of revenue generated by low-cost carriers and full-service airlines were used to reach an average value. For brand value, historical merger and acquisition cases were taken into consideration, ascribing separate value to the brand,” the person said.

The airline has 4,486 domestic and 2,738 international slots across Indian and major international airports.

“The airline is losing Rs 25 crore cash daily. It is estimated that if the current disinvestment exercise fails, the government will need to infuse close to Rs 650 crore per month to keep the airline running. So, this is not a revenue generating exercise but a process to arrest future losses,” a government official involved in the matter said.

The government intends to complete the process by FY22 so that the money received can be counted for the disinvestment process for the current fiscal.  The Ministry of Civil Aviation has asked Air India to finalise its H1 FY 2021-22 accounts “on a priority basis”. An exercise is on to calculate leave encashment liability at the earliest for which employees have been asked to update their leave records by the month-end.

“We intend to complete the transfer by the end of the calendar year. Following transfer of shares, there will be a hand holding period of six months during which the new owner will take control gradually,” said another official.