EY burnishes its credentials with successful Air India sale to Tatas

In 2017, when the government had initiated the process of selling Air India and its subsidiaries, it decided to appoint two transaction advisors. The task was humongous and it didn’t think one advisor could pull it off. But an issue broke out. British multinational bank Rothschild & Co, one of the two believed to get the mandate, decided against the fee of 0.2 per cent of total transaction value, citing it as “too low for such a complex process”.

According to guidelines of the bidding process, the fee quoted by EY - the highest in the preferred bidder list - was set as standard for the transaction. EY quoted 0.4 per cent of the total disinvestment proceeds reduced by debt and Rothschild would have been paid half the share.

“We were sceptical in the beginning to have a single banker. But looking at the track record of the EY team, which had been involved in multiple aviation merger and acquisition exercises out of India, we went ahead,” said a government official.

The team at EY had been involved with Jet Airways takeover of Air Sahara in 2007, Sun Group acquisition of SpiceJet in 2010, and when billionaire Wilbur Ross invested $80 million in SpiceJet in 2008.

Four years later, the team of 50 has been able to close the deal, which will see the government saving at least Rs 20 crore of daily cash-burn on the loss-making airline.

One, the saleability of the product: with Air India’s finances in disarray and multiple issues with its fleet and organisation, marketing the airline to suitors was a difficult job.

The EY team marketed Air India primarily as an international airline in the multiple roadshows it had with prospective suitors. “To the Tatas who were reluctant bidders initially, the team convinced them with the cost advantage they would have with an inorganic expansion. Air India has trained human talent, multiple slots across global airports, and international flying rights. It would take them at least an equivalent sum of money they were paying for Air India, but many more years to attain that scale. We were not convinced about the success of our sales pitch till the day the expression of interest came in,” said a person, elaborating on the challenges of marketing the airline hamstrung by debt and organisational ineptitude.

Even so, for the bidders the biggest worry was the fear of the unknown. They were worried that the hidden faults were higher than what a due diligence process could find.

EY convinced the government to do an independent review of Air India’s vendors and supplier contracts, its litigation and human resource-related issues, and make a status report available to the qualified bidders.

“The fear of the unknown normally gets amplified, which ultimately dissuades the buyer. That had to be assuaged for the process to be successful,” said the person, quoted earlier.

Two, being a government transaction, everything had to be under set guidelines and approved by multiple people. This was quite unlike two private companies agreeing to merge, where deals were closed over drinks and dinner.

“The mettle of the team was tested in convincing the government officials about the demand of buyers. Changing rules of divestment process is not something that happens easily. Since a government official can be hauled up even 10 years hence, EY had to convince the officials strongly for every change done to make the sale possible,” said a person involved in the process.

In July, when the country was springing back to life after lockdown, EY organised a presentation for Home Minister Amit Shah and his five colleagues. At the two-hour-long presentation, it said if ministers were to halt the process and resume it after the pandemic, it would cost the exchequer Rs 15,435 crore (or Rs 620 crore per month).

Instead, the government must eliminate any pre-fixed debt and allow bidders to quote an enterprise value based on a combined debt-plus-equity value - a model never tried in the history of the government’s privatisation exercise. They argued it would allow for market discovery of value, based on real assumptions, Also, the process would not be anchored to a debt level, which, until now, was an indicative reserve price for bidders.  

“This would not be a lucrative deal for EY monetarily, but it has burnished its image for being able to pull through such a complex transaction. It may not add to the league table, but it will be remembered by the industry and enrich EY’s understanding of handling such transactions where the government is involved,” said an investment banker.

With the Air India deal closed, the team at EY is gearing up for more government asset sale programmes. EY has been selected as the transaction advisor for selling 100 per cent of government stake in Rashtriya Ispat Nigam.