Jet Airways and Sahara Airlines Conclude Settlement Agreement

17 Apr 2007

Jet Airways and the Shareholders of Sahara Airlines Limited had concluded a Share Purchase Agreement on 18th January 2006 whereby Jet Airways was to acquire the 100% shares of Sahara Airlines Limited for a Total Consideration of Rs. 2,000 crores. The original 65 day Term of the Agreement expired in March 2006. This was mutually extended to 21st June 2006, at which time Jet Airways also paid an advance of Rs. 500 Crores , the repayment of which was secured by a Pledge Agreement and a personal guarantee of Mr. Subroto Roy Sahara.

At the expiry of the extended period, disputes arose between the parties as to whether or not the agreement had terminated (for non fulfillment of some conditions). These disputes were referred for hearing to an Arbitral Tribunal comprising of The Lord Steyn, Presiding Arbitrator, Mr. Justice S.P. Bharucha, the former Chief Justice of India and Mr. Justice Jeevan Reddy, former Judge of the Supreme Court.

Current Status:

Before the commencement of Arbitral Proceedings, the two parties successfully resolved their disputes and were able to draw up a Settlement Agreement The Arbitral Proceedings were disposed off in terms of this agreement.

This agreement has a confidentiality clause, and thus its terms cannot be made public. The salient commercial terms on which the the Settlement Agreement is based are as under:

- Jet Airways has agreed to acquire the 100% shares of Sahara Airlines Limited for a lumpsum amount of Rs. 1,450 crores, of which a sum of Rs. 500 crores had already been paid to the Selling Shareholders in March 2006.

- A sum of Rs. 400 crores is payable on or before 20th April 2007.

- The balance of Rs. 550 crores will be payable in installments commencing from March 2008 and ending in March 2011.

- Simultaneously with the payment of Rs. 400 crores, all the shares of Sahara Airlines Limited will be transferred to Jet Airways without any restrictions or conditions attached.

At the current interest rates, the Net Present Value of the Total Consideration payable is approximately Rs. 1,200 crores. Thus, the NPV is approximately 40% lower than the Total Consideration of Rs. 2,000 crores payable under the January 2006 Share Purchase Agreement.

The agreement contains terms and conditions as to a positive net worth and the state of the net current assets etc, which have not been made public. Some of the comments suggesting that Jet Airways is taking over a Company with an unidentified level of current liabilities or one that has been stripped of all or most of its assets, are speculative and possibly motivated.

This transaction is based on a degree of faith displayed by both parties, who were earlier locked in litigation. It shows that large commercial organizations can rise above differences and find ways to resolve commercial disputes. The terms and conditions of payments as well as the state of Sahara Airlines reflect the faith the parties have had in each other. It is unfortunate that ill informed comments seek to cast aspersions on this deal without any foundation.

As has been pointed out by analysts, the renegotiated price represents a significant discount to the earlier price and will enable Jet to get an incremental market share at a much lower price. It, therefore, strengthens Jet Airways’ position in the domestic Indian market. The truth is that Jet Airways position is significantly strengthened by acquisition of Sahara Airlines, and no less by putting an end to a litigation that would have lingered for some time without any value to either of the litigants. Some of the reactions can fairly be attributed to fears fuelled by Jets resurgent position after this deal.

Equally untenable is the speculation about the reasons as to why Jet Airways arrived at this settlement - it is suggested that it realised that its legal position was untenable and thus settled. The falsity of this is apparent from the fact that Jet Airways settled the dispute mutually with Sahara - it did not concede the case. Sahara had claimed the entire price and damages (equal to its losses in the last 10 months), whereas Jet Airways had contended that the agreement came to an end in June 2006.

The Settlement is for a re negotiated price which accords favorably with the current trends and the developments in the domestic aviation industry over the previous 12/15 months.

On its face, it shows that both parties acted as sensible commercial organizations, and settled a dispute that would have lingered for a long time - after the arbitral award, an appeal (to the Bombay High Court) was available to either party, since the award would be a "domestic award". The fact is that both parties were successful in negotiating mutually acceptable terms, , and this course of action was preferable to both rather than litigation..

Sahara Airlines Limited has thus been acquired by Jet Airways as a going concern with a significant long-term potential in the future.

The conclusion of the Settlement Agreement will enable the Jet Airways management to concentrate on its long term expansion plans on international routes and the induction of its new wide body aircraft fleet.

Sahara Airlines Limited will continue to operate as a separate entity as a wholly owned subsidiary of Jet Airways. It will continue to operate to its currently approved Summer schedules. All commercial agreements, be it with corporate houses or travel agents will continue to be effective. The airline will be fully backed by Jet Airways operationally and financially.

Benefits:

Jet Airways firmly believes that the acquisition of Sahara Airlines Limited will enable it to derive significant commercial and economic benefits keeping in view the current state of the domestic aviation industry. It will enable us to derive:

- The benefits of synergy between two airlines with common fleet, network and stations. Further synergies will be achieved through cross utilization of qualified personnel and infrastructure.

- The advantages of achieving consolidation and availability of a larger operational base for future expansion and also tackle competition.

The key benefits to Jet Airways on account of this acquisition are as under:

- Offers a strong platform and a larger operational base for future growth.
- Achieve a wider and a more effective coverage of the Indian market and giving the two airlines a very strong position especially in the metro markets.
- Increased prime time departures and frequencies through a subsidiary.
- Obtain access to skilled personnel such as Pilots and Engineers, categories of which there presently is a significant shortage in India.
- Unit cost savings and improved levels of productivity due economies of scale and common utilization of facilities and resources, arising particularly from common maintenance and training facilities, airport handling facilities, enhanced purchasing power, finance and administrative set-ups, etc.
- Clear value proposition for the customers in the form of wider network coverage, enhanced and convenient connections and better service levels on a larger scale of operations.
- Increased availability of airport infrastructure facilities.
- Since Sahara Airlines will operate as an independent carrier with its own Operating Permit, it will have access to available traffic rights for international operations.

As has been pointed out by several analysts, the renegotiated price represents a significant discount to the earlier price and will enable Jet to get an incremental market share at a much lower price.

Another important benefit that Jet Airways will derive from the acquisition of Sahara Airlines is that their subsisting order for the additional 10 B737NG aircraft which are scheduled for delivery between June 2009 and August 2011, thereby enabling Jet Airways to have access to additional aircraft to expand its fleet. This represents substantial additional intangible assets for Jet Airways since it currently has no aircraft on order and delivery positions are not available before 2011 or only available at a premium.

The aviation market and scenario in India has seen major developments in the last 24 months. Not merely has the market grown very rapidly, but the industry has seen the entry of a number of new carriers with aggressive pricing policies and significant additions of capacity leading to decline in fares and yields, cut-throat competition with the industry and all operators incurring huge losses.

The acquisition of Sahara Airlines gives Jet Airways the opportunity to reassess its strategy and use this carrier to provide an innovative service concept of higher quality than current no-frills carriers. This combined with operational reliability and some service elements tailor made for Indian tastes, whilst offering competitive fares, delivered through a cost effective business model backed by synergies with Jet Airways.

Conclusion

The settlement makes eminent sense for Jet Airways in the current state of the Indian aviation market. It strengthens Jet Airways’ position in the Indian aviation market and enables access to new market segments.

We therefore believe that the two airlines will jointly deliver value to the customers and shareholders.

Source : Equity Bulls

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