Analysing Jet Airways Sahara airlines merger

The first takeover attempt was made by Jet Airways on 19 January 2006, when Jet offered US$500 million in cash for acquiring Air Sahara. The news was received with mixed emotions amongst the investors in the market and analysts even suggested that Jet had overvalued Sahara. In spite of getting a go ahead from the Indian Civil Aviation Ministry, the deal fell apart due to disagreement on the price. Lawsuits were filed by both the companies seeking damages from each other. The second attempt was made on 12th April, 2007 and this time Jet Airways managed to buy Air Sahara for Rs. 1450 Crores. This merger marked the beginning of consolidation in the Indian Aviation sector.

Motive of the Acquisition

The merger of Jet and Sahara gave Jet Airways access to the entire leased fleet of 27 aircrafts of Air Sahara along with its infrastructure and logistics. It also gave Jet Airways presence in those areas in India where they were not there but Air Sahara was. Air Sahara proved to be complementary to Jet even in the international arena. While Jet was operating on long haul routes such as US and Europe, Air sahara operated to neighboring countries such as Sri Lanka, Nepal and Thailand. Jet had about 62 aircrafts and operated 320 flights to 44 domestic destinations and 6 foreign destinations at the time of the deal. One major gain for Jet in the deal was that it could gain access to Saharas parking slots in Londons Heathrow airport as well as in Delhi and Mumbai. Another factor was that there was a huge shortage of airline pilots. Hence, it could utilize Air Saharas pilots. The maintenance facilities of the smaller carrier would also be available within the country. Since Air Sahara had leased all of its 27 aircrafts, Jet would not own them and hence there was not much gain in terms of tangible assets especially since Air Sahara was not transferring its real estate and helicopters. However when the deal was announced in January 2006, the plan was to take over all of Air Saharas assets for $545 million. Jet Airways was also looking at capturing more market share post the deal. It used to have a 40 percent market share which fell down to 27 percent at the time of the deal. The major reason was Jets intention of becoming the king of Indian skies by becoming the number 1 private airlines in the industry.

Summarizing the reasons of merger

Buyout to make merged entity largest domestic private carrier with market share of 42% and fleet of 88 aircraft, 27 operated by Air Sahara Jet Sahara was expected to turn into the only privately owned airlines which was permitted to fly international routes The deal is commercially viable since Jet would get a lot of infrastructure and manpower areas where India is facing a lot of pressure now Jet to gain access to Saharas parking slots in London, Delhi and Mumbai Low costs through economies of scale would enhance the capability of Jet to compete with the low cost carriers in terms of price Air Sahara was proving to be a very good buy as its financial status was better than most of its competitors. The debt equity breakup of Air Sahara was about Rs. 500 Crore funded by promoters which comprised of Rs. 236 Crore of equity, Rs. 50 Crore in preferential shares and loans taken by the group amounting to Rs. 250 Crore. The remaining promoters contributed around Rs. 40 to 50 Crore.

What went wrong?

The terms of transfer of the infrastructure of the airports was quite unclear in the policy related to M&A in the Indian civil aviation industry. Even though the guidelines were comprehendible in terms of parking bays and landing slots, they did not tell anything about the status of aircraft hangars, check-in counters, cargo warehouses, passenger lounges and other such airport facilities post the merger or acquisition. Since Jet was very keen on becoming the number one private player, they rushed into the deal and overvalued Sahara. Later on they wanted a discount on the deal of the order of 2025 percent on the original bid. This exhibited that Jet was showing signs of overvaluing a company which did not have a robust business model. The combined Jet Sahara entity would achieve economies of scale and would put Jet in a position of advantage from where it could better drive the market economies. But still, it would not have attained monopoly as it had initially thought. The growth in passenger traffic was predicted at 40 percent which ensured that there would still have been a gap in the available seat capacity.

Air India and Indian Airlines were due for a merger which together would account for one third of the domestic market. This was a big threat and direct competition to the merged Jet Sahara entity. According to the policy issued by the government in April 2006, only parking rights and slots for flying time were transferable in case of acquisition of an airline. As a result, Jet would not automatically get the maintenance facilities of Sahara and the commercial spaces at airports such as airport counters and lounges belonging to AAI or GMR and GVK group in Delhi and Mumbai airports and Jet would have to renegotiate for the same. Also, since these airport operators were planning huge capex, Jet might have to pay up more for the same facilities.