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Lenders of India's Jet Airways delay decision on Etihad bailout

UAE airline proposes to buy shares at steep discount

Naresh Goyal, chairman of Jet Airways, speaks during a news conference in Mumbai in November 2017.
Naresh Goyal, chairman of Jet Airways, speaks during a news conference in Mumbai in November 2017.   © Reuters

MUMBAI -- Lenders to troubled Indian carrier Jet Airways met on Wednesday to consider a rescue proposal by Etihad Airways in which the United Arab Emirates airline would inject about $35 million and become the biggest shareholder, on condition that founder Naresh Goyal steps down as chairman.

But the five-hour meeting proved inconclusive as the consortium of lenders, led by State Bank of India, could not agree on Etihad's proposal to buy Jet Airways shares at 150 rupees per share, sources said. Lenders want the shares priced based on the formula set by the Securities and Exchange Board of India, which takes the weighted average of 60 trading days of the scrip before the offer is made.

Etihad has written to lenders offering to buy new shares in Jet at a steep discount of 150 rupees each, in addition to the capital injection, against Wednesday's midday price of 271 rupees, according to a person with knowledge of the letter. The airline wanted to be exempted from making a full offer for the Indian carrier, however. Under its proposal, Etihad could end up with a stake of more than 45%, according to local media, which could trigger regulations requiring a full offer.

The proposed capital injection by Etihad will not be enough to resolve Jet Airways' financial crisis, however, with some 30 billion rupees ($425 million) in debt maturing by March. However, an immediate injection would partly cover working capital needs and any interest payments.

But a capital injection is likely to be part of a wider restructuring plan, which will be discussed by lenders. That plan could help to minimize the chances that creditors will be forced to accept a cut-price repayment of their loans, said Edelweiss, a Mumbai-based investment and financial services company.

In November, India's Tata Sons acknowledged that it was considering an acquisition of Jet Airways, but the holding company of the $103 billion Tata Group appears to have faced obstacles in negotiating a deal. Insiders say Jet Airways was not keen to sell a stake to Tata Sons, fearing that the Tatas might kill the brand and initiate job cuts.

In the meantime, Abu Dhabi-based Etihad -- which already possesses a 24% stake in Jet Airways -- appears to have stepped in.

"It is only logical that Jet Airways would prefer a stake sale to existing partner Etihad rather than to another company," a source familiar with the developments said. "The talks are in the final stages."

Local media report that Goyal's ownership of the airline he founded 20 years ago would fall from 51% to just over 20% as a result of the deal. He would also step down as chairman.

India's foreign direct investment rules let outside carriers own only up to a 49% stake in a domestic airline. Management control needs to remain with the Indian company.

The proposal to have Goyal step down from the board, though, has the blessing of Jet Airways lenders. The airline's overall debt totals 84.1 billion rupees, of which nearly 60% is dollar denominated.

Jet Airways confirmed a resolution plan was under discussion by stakeholders. "The various options therein, being privileged and confidential, are yet to be crystallized and agreed to by the stakeholders in the best interests of the company," Jet Airways said in a statement. "The company ... will, at the appropriate time, make necessary disclosures and statements in order to ensure transparency and avoid speculations and rumors in respect of the subject matter."

The news of Etihad's low valuation offer for Jet Airways sent the company down Wednesday as much as 7.9% on the Bombay Stock Exchange, marking its biggest intraday fall since early December.

At the end of December, the airline defaulted on a "payment of interest and principal installment due to the consortium of Indian banks" because of a "temporary cash flow mismatch," the company said in a stock exchange announcement.

The carrier has suffered three straight quarterly losses while battling high fuel prices, a weakening rupee and intense competition that has slashed fares. Jet Airways reported a net loss of 12.97 billion rupees for the July-September quarter, swinging from a profit of 496.3 million rupees a year earlier.

The troubles forced the airline to stop paying some employees' salaries and delay payments to vendors. Jet is trying to cut costs while improving the capacity and efficiency of its fleet and workforce.

Edelweiss cited the opportunity offered by new capital.

"With liquidity issues plaguing the company over the past few years, growth suffered from [Jet's] market share nose-diving to 14% from a high of 30% in 2012," Edelweiss said in a note Thursday. "A fresh equity infusion will enable Jet to exploit lower oil prices and expand fleet capacity to leverage the fastest-growing aviation market in the world." However the viability of the restructuring plan depended on the findings of a forensic audit, due by January-end, the broker said.

For Etihad Airways, becoming Jet Airways' biggest shareholder would mean the opportunity to exploit India's booming aviation market. The UAE carrier would also be able to leverage Jet Airways' large international routes and prime parking slots.

However, Etihad has its own troubles. Like its Indian partner, Etihad has been posting losses over the past two years. It has also reportedly laid off 2.5% of its 2,065 pilots. Two European airlines Etihad had invested in, Alitalia and Air Berlin, have filed for bankruptcy protection.

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