Air India divestment: Possible bidders suggest government should keep Enterprise Value money in company

Possible bidders have three raised queries about Air India’s divestment process as the deadline for the responses to Clause 6 of the Preliminary Information Memorandum came to an end on midnight November 12.

Clause 6 relates to the proposed reallocation of debt and liabilities and introduced Enterprise Value based bidding for the state owned carrier.

While acknowledging the government’s desire to receive some proportion of the Enterprise Value (EV) in cash as being logical, one of the parties possibly interested in participating in Air India’s divestment has recommend that the focus should be on the cash required by the ailing company in difficult times and not on taking any money out of the business.

“We therefore believe the 85 per cent /15 per cent condition is misguided and contrary to the government’s aim --- which is to divest AI successfully on a basis that makes the airline thrive. The entire EV should be left in the Company in the form of assumed debt,” the interested bidder has said in a written query to the transaction advisor Ernst & Young.

The government has decided that whatever EV a bidder quotes, it will have to provide a minimum 15 per cent of that value in cash to the government.

On October 29, while extending the last date for submission of Expression of Interest for Air India to December 14, the government had also decided not to pre-determine AI’s debt but leave it to the market to decide.

The government plans to sell 100 per cent of its equity share capital in the state-owned airline, including Air India’s shareholding interest of 100 per cent in AI Express Limited (AIXL) and 50 per cent in Air India SATS Airport Services Private Limited (AI SATS).

Another possible interested bidder points out that what matters most is the long-term success of Air India which will be a significant contributor (directly and indirectly) to GDP and also to the Indian Exchequer.

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A possible bidder adds that for creating long term success, the successful bidder will need to invest cash in upgrading the owned and leased fleet. “An airline is a commodity business wherein any operator must be the most efficient and have the lowest cost per seat kilometre. This requires having the latest generation of aircraft that are suitable for the task,” the possible bidder adds.

Obligations

The possible bidder adds that there are large amounts of cash required to bring into service aircraft that are not in service for any reason, besides which return obligations to lessors will need to be paid. “Large amount of cash is required to meet health, gratuity and other employee benefits. Any restructuring will require large amounts of cash including any Voluntary Retirement Scheme,” the possible bidder says requesting the government to keep this in mind in its deliberations.

Another query has sought a breakup of the current and non-current assets and current and non-current liabilities along with their ageing profile as also details of receivables and details of the current maturity of long term liabilities. “Please provide details of outstanding debt of Air India, AIXL and AI SATS containing information such as but not limited to terms, tenor, security package, hypothecation and repayment schedule,” the proposed bidder says.

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