The Deal Is Dead, Amen!

Jet-Sahara deal crash-lands; airlines land in court

BY SAMIDHA SATAPATHY
July 7, 2006

For the first time after the collapse of its deal with Sahara, Jet Airways chairman Naresh Goyal is touching down in India this week for a meeting of the Jet Airways board of directors. Goyal has been hauled up in London all through the high-profile divorce drama. The Jet board is expected to take stock of the issues arising out of the failure of its deal with rival Sahara.

The Jet-Sahara merger plan crash-landed last month after Jet Chief Naresh Goyal failed to obtain regulatory approvals, allowing Jet to pull out of the $500 million deal, on "technical grounds." Both Jet and Sahara immediately moved courts in order to gain control of the advance money in the ICICI escrow account. Following this, the Lucknow district court has frozen the account through an interim order until June 30, after hearing both sides of the case.

While Air Sahara President Alok Sharma maintained that "We had made an offer for a possible extension of 15 days' deadline, Jet is in no mood for a rapproachment with Sahara.

The Sahara group had managed to obtain a temporary restrain order from the Lucknow court, preventing Jet from taking back the Rs.500 crore. Meanwhile, Jet filed an arbitration petition looking to protect the escrow account, with the Bombay High Court.

Jet had paid Rs.500 crore as advance payment for Air Sahara to the escrow agent, and the carrier contends that the agreement is rendered invalid if the conditions of the agreement are not met by June 21. Conditions yet to be fulfilled, according to Jet, included transfer of infrastructure facilities like parking bays, arrival and departure slots.

Various reasons for the deal falling through are being cited. While there is sufficient speculation that the government misused its discretionary powers to affect the merger, raising concern over regulatory issues for mergers and acquisitions, Sahara officials tell a different story. According to Alok Sharma, "The only reason they gave us was that they were going through a financial crunch and they wanted a cut in the deal." Naresh Goyal not getting security clearance should not have constituted sufficient reason for the merger to fall through, suggest analysts.

All through the period when the buyout deal was in doldrums, the Indian stock markets went into a free fall, with the benchmark stock market index losing around 2500 points. The mayhem did not spare Air Deccan, the low-cost airline which got listed during this period. The Deccan stock got a major hammering and is currently trading below issue price. However, after news came in about the collapse of the Jet-Sahara acquisition deal, airline stocks, including Jet Airways, SpiceJet and Air Deccan perked up. The collapse of the deal is seen as positive for the airline industry. The Jet Airrways stock had plunged when the Sahara buyout deal was announced. The market expects increased competition in the days ahead.

According to reports, Jet had made overtures to Sahara in the run-up to the collapse, to get Sahara to reduce the acquisition price. However, Air Sahara was not willing to relent. Sahara felt that it was in a dominant position legally, though the airline itself was bleeding.

Following the collapse of the deal, there were rumours that Vijay Mallya's Kingfisher Airlines would be taking a relook at Air Sahara. Late last year, Kingfisher was interested in purchasing Air Sahara, but pulled out since the price was too high. In an interesting development, low-cost airline GoAir said that it may be willing to buy Air Sahara "if the price is right". Talking to BusinessLine, GoAir MD Jeh Wadia, however, said that there have been no talks in this direction so far. Almost every Sahara suitor has been put off the high price set by Ernst & Young set for the airline. Most airlines felt that the loss-making Air Sahara is too high-priced, given that its entire fleet is composed of leased aircraft. Since foreign airlines are not permitted to buy stakes in Indian carriers, Sahara will have to a find a wealthy domestic suitor to sell its airline.

Legal experts say that Jet Airways is in a weak wicket following its withdrawal from the buyout. Sahara has alleged that Jet took it for a ride and killed its brand in the few months that it ran Sahara. In these months, the market share of Sahara declined to 8% from the earlier 12%. Many pilots and executives left Sahara for safer shores during the months of mayhem. Now, Sahara is reportedly planning to pump in Rs 400 crore to revive the ailing airline.

A financial analyst said, "The deal was proving to be an expensive proposition for Jet Airways. Not only was it paying $500m to buy Sahara but it would have ended up paying more money to bring it to the same operational level as itself." He adds, "It would make more sense for Jet to invest all those resources in consolidating its position in the domestic and international markets."

The takeover would have pushed Jet's stake in the domestic market to almost 50 per cent.