The Jet-Sahara mooch ki ladai

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Disclaimer: As of the time of writing, the Jet Sahara merger wasn't happening but there are bound to be more twists and turns in the whole affair.

Bottomline: Jet is prepared to lose its first down-payment of Rs 500 crore to step away from the Rs 2,300 crore it offered in January. At the least, it's prepared to lose the opportunity costs on Rs 500 crore that it has already paid, the commitment fee of Rs 100 crore and whatever it has spent so far (about Rs 80 crore) in operations.

There are some hilarious conspiracy theories floating around. Here's one which comes from people close to the jilted party: Jet set Sahara up and cunningly sabotaged it while running it. Under this theory, Jet considers Rs 600 crore-odd a reasonable price to pay for the long-term business gains in knocking out a rival.

One doesn't have to take a "pro-Sahara" stance and buy into this. It's rational to believe that Jet didn't like the numbers after running Sahara for several months. Despite the transfers of substantial infrastructure assets and the 9-10 per cent Sahara marketshare, it's not willing to sustain the running losses at a price of Rs 2,300 crore.

Jet did apparently ask Sahara for a 20 per cent cut "" if that is true, Jet thought the deal was fairly priced at around Rs 1,900-2,000 crore. I assume that it expects to get the Rs 500 crore back and pull out of the deal after losing Rs180 crore or thereabouts. On the flipside, it stood to save about Rs 300 crore.

Fair enough, this seems close to equilibrium in terms of risk:reward after you do some cost estimates on opportunity losses for the timeframe that Rs 500 crore is stuck in limbo. And you'll have to factor in higher legal fees.

For the trader it creates opportunities in several timeframes. You could buy Jet's shares for the short-term on a contrarian perspective. The news of the merger failure has led to understandable hammering of the stock. That's eased off and the stock has recovered from Rs 600 levels to climb back above Rs 700. It was trading at near Rs 750 early in June.

Good news or bad news on the Rs 500 crore front could lead to a sharp swing. Up or down? That depends on the news. Do you trust Jet's implicit assumption that it can recover the Rs 500 crore without too much hassle? If you do, you'd be long.

Would you weigh the Goyal factor against the undoubted clout of the Sahara Group? This does, after all, show all the signs of turning into an affaire d' ego "" a mooch ki ladai, between two of the most colourful people in business. Impressive powers of "managing the environment" as Dhirubhai Ambani once described it, will be called into play by both sides.

In the long-term, the view on the Jet stock has to be more nuanced. If it doesn't want Sahara after running it for several months, it will probably be looking at other means of growth.

The airlines business is precariously poised; there's huge traffic growth but most of that has been generated by discounted ticketing. In the long run, Jet could find it difficult to maintain current margins.

Especially if crude prices don't level off and the Indian state excises on ATF are not rationalised.