How government sweetened the Air India divestment deal to attract more bidders

Civil aviation minister Hardeep Puri on Thursday announced that the government has decided to revised the bidding parameters for Air India’s divestment and has decided to ask for bids at enterprise value.

This essentially means bids will now be sought on both equity and debt.

The new parameters will give more flexibility on debt to the bidders. The bidders will be given the option to decide on the quantum of debt on the Air India books that they’d like to absorb.

“Interacted with members of the fourth estate today to discuss Air India disinvestment. Instead of a pre-fixed debt level, bidders are now allowed to quote Enterprise Value of Air India. This gives more leverage to bidders for participation in the process,” Puri tweeted on Thursday.

As per the earlier Preliminary Information Memorandum (PIM), the bidding was sought on the basis of only the equity value.

The national carrier was put on the block by the government on January 27 while a deadline of March 31 was set for bidding. It was later extended.

The government has been planning to sell its entire stake in Air India Ltd amid increasing debt and mounting losses. The Centre had, in January, announced the stake sale after an attempt to auction a majority stake almost two years ago failed to draw any bid.

The airline’s accumulated debt is estimated to be more than Rs 69,000 crore. It posted a loss of Rs 8,556 crore in FY19, as against a net loss of Rs 5,348 crore in the previous financial year.

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According to experts, the new parameters will allow bidders to decide the capital structure of the national carrier.

“This would make sense if the existing debt would not be transferred, as it would give flexibility to the investor to decide capital structure,” said Manish Agarwal, head of infrastructure advisory at PwC India, a consultancy.

In the current PIM, the debt left in the company would be Rs 23,286 crore. As per the PIM issued by the Centre in January, the government planned to sell its entire stake in the airline and 50% of a ground handling unit. The successful bidder will have to take only a debt of Rs 23,286.5 crore (the 2018 offer required them to take on a little over Rs 33,000 crore) , while the liabilities will be decided depending on current assets at the time of closing of the transaction, according to the PIM.

As per the corrigendum, interested bidders can choose to specify a lower percentage (than 85%) of the enterprise value to be retained in the form of debt, and instead offer the same amount in the form of a higher cash consideration to the government against the purchase of 100% equity share capital of Air India.

“The bid will be on the enterprise value...In this enterprise value also, a ratio has been earmarked between how much a bidder can take as debt and how much (s)he has to give as cash. It has been decided that whatever enterprise value the bidder quotes, 15% of that has to be given in cash to the government and remaining 85% has to be taken as debt,” aviation secretary Pradeep Singh Kharola explained.

The government also extended the deadline for inviting bids till December 14 for the fifth consecutive time since January in a bid to give investors more time.

The Centre in August had issued a notification to extend the deadline for submitting the expression of interest for the 100% stake sale of national carrier Air India by two months to October 30. The extension was provided following requests from interested bidders due to the Covid-19 pandemic, the third time since the process began in January. Puri said more than 500 queries were received from interested bidders when the process began.

The decision was taken by the Air India Specific Alternative Mechanism (AISAM) on Wednesday following a meeting with the home ministry, Puri said. The AISAM, headed by Union home minister Amit Shah, also includes finance minister Nirmala Sitharaman, aviation minister Hardeep Singh Puri and commerce minister Piyush Goyal.