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“Buy the rumour, sell the news” is an adage as old as the markets. By this logic, Jet Airways becomes a sell. The best possible news that could have been expected has hit the markets, when Etihad announced it would buy a 24 per cent stake in Jet Airways through a preferential allotment.
The immediate benefit that could have been expected from the deal was that minority shareholders would get a chance to submit their shares in the open offer. But this is not going to happen as Etihad will be picking up only 24 per cent stake in the company, a tad short of the 25 per cent required to trigger the takeover code. Also, there will be no ‘change in control’ in the management of Jet Airways, another criterion for triggering the code. Thus, there is no immediate benefit for shareholders from the deal, apart from the change in perception.
In the medium term, the Jet balance sheet will become a little healthier, with an improvement in its debt-equity ratio. Major gains from the deal for Jet will be in its international operations, rather than in India. There are synergies in schedule coordination, sharing of infrastructure, maintenance, sales offices and joint purchases. Hopes of Etihad reducing its number of flights to accommodate Jet Airways are unlikely to be met; Jet will have to make way for the bigger parent.
There is little doubt that the deal is skewed in favour of Etihad, which it should be, as it is pumping in money. Etihad, which was having trouble increasing its current market share in India (low at two per cent), compared to 13 per cent of Emirates, will now have greater access to Indian cities through a deeper code sharing arrangement with Jet.
From Etihad’s point of view this deal is akin to buying out a competitor and gaining market share. Etihad needs to fill its plane first and then think of helping Jet Airways survive. Being the national airline of the United Arab Emirates, the company has managed to strike a deal with the Indian government on seat expansion, with hopes of making Abu Dhabi a transit hub. Etihad would appreciate the burgeoning numbers of Indian passengers and Jet is the means to reach them.
For Jet, the deal would result in an inflow of Rs 2,060 crore, which would disappear in a flash, given its huge pile of debt of Rs 12,600 crore. For the year ending March 2012, the company’s interest outgo (consolidated) was twice its operating profit. All that had remained in its net worth was Rs 130.9 crore. Without this deal, there was a threat of complete erosion of its equity.
While Jet gets some breathing space with the fund inflow, allowing it some more room to leverage itself, the deal will do little to help the company face the challenging climate in India. With AirAsia expected to start operations, things might only get tougher. Etihad is a full-service airline and not a no-frills one like AirAsia. Thus, its expertise will be of little use for Jet Airways to carry out its operations in India.
With Etihad getting some board representation, Jet Airways might find it difficult to operate as freely as it used to earlier. There is no doubt that valuable insights will come in from Etihad’s member but this will be only when Jet is not seen to be stepping on Etihad’s foot.
The Jet Airways stock opened at the day’s high of Rs 688.60 and slipped continuously to close the day at Rs 635.20, near the day’s low. There were clearly more sellers in the stock than buyers.
There is nothing in the short term for the stock, while the medium term picture is hazy. Should you still hold on to the shares?
