Air India divestment: Is bidding on enterprise value the way to go?

Analysts and industry experts are divided on whether the government proposal for Air India’s divestment unveiled on Thursday is possibly its most serious attempt to put the state-run airline into private hands and more importantly if this attempt is going to bear fruit.

In its latest attempt, the government has decided not to predetermine AI’s debt level and leave it to the market to decide.

“The debt level which was pre-fixed has now been unshackled and therefore Enterprise Value (EV) bidding can take place,” Tuhin Pandey, Secretary, DIPAM said. EV is the sum total of debt and equity.

Earlier, the government wanted bids based on the value of airline’s equity. Kapil Kaul, Chief Executive Officer and Director, CAPA Advisory ,said, “The changes are based on the feedback from investors. Allowing market forces to determine AI’s debt levels is the best and most feasible option given the circumstances. In the post-Covid situation and given the tight fiscal situation, taxpayers funding AI again and possibly continuously will be extremely resented,” he points out.

Kaul is also of the view that privatising AI even with a few more concessions will be the right decision and the government’s strategic clarity and decisive commitment is very positive and encouraging.

‘EV not the way to go’

“Only for fiscal 2021 and 2022, we are looking at minimum $3 billion funding in AI. How can this be justified?” he asks. However, differing with Kaul, Lewis Burroughs, Head of Aviation, India, ICF Consulting India Private Ltd, maintains that seeking bids at Enterprise Value is not a “realistic approach” especially as the value is probably negative due to its high debt and losses. Though industry watchers are keen that the government should follow through by selling its stake without penny-pinching, they also point to other issues which are likely to surfaces.

“There is enough and more worry for the new owner,” said an analyst who declined to be identified. According to him, a new owner will have to consider the uncertainty in the market, competition and age of AI’s aircraft.

Prospective bidders will also look at slots that the airline has around the world. While this was seen as a distinct advantage for AI earlier, this may no longer be the case in the post Covid scenario as the value of the slots has in all probability declined due to decline in demand.

Another advantage which AI enjoyed earlier was the wide body aircraft in its fleet.

According to an industry watcher, “The value for the wide-body aircraft has taken a beating, and with long-haul routes expected to be the slowest to recover, it may be some time before the value of these aircraft is realised,” he says.

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