Air India sale: Finding value, giving up control
Air India brings to mind an image of a debt-laden airline failing to find a suitor. For a carrier with a large fleet, peak-hour slots, superb network of flights, and global agreements, is that the right perception? Beyond the obvious is an airline worth much more than it is perceived to be. ET Prime brings to you the first-ever attempt to value Air India.
Debleena Majumdar
8 Jun 2018
Price is a number — a fact. Valuation is a story — a narrative.
Usually the seller works out such things, but as the first part of our story pointed out, the government has so far been unable to do that for Air India.
With no bidder lining up, it might seem that Air India isn’t coveted. Truth be told, there is a school of thought that would agree to it.
In 2012, the government gave a struggling Air India a INR30,000 crore bailout package. While it helped improve metrics, the airline failed to reach targets outlined in its turnaround plan. It has been losing customers, is laden with debt, and the nostalgic Maharaja branding is almost anachronistic.
Having said that, smart acquirers will value it for
What it could be
Its effect on the competition
The assets and privileges such as landing rights
ET Prime posed this question to Duff and Phelps, the investment banker and valuation expert: “What is Air India worth?”
A two-step attempt at valuing Air India
Duff & Phelps analysed the trading valuation multiples for domestic and foreign airlines. The implied median value ranged between INR21,280 crore and INR35,688 crore based on comparable companies’ enterprise value(EV)-to-revenue and EV/EBITDA multiples. This estimate is just based on a comparison of relative comparables. There are other detailed methods of valuation such as intrinsic valuation and contingent-claim valuation.
Meanwhile, the government expects the airline to be valued at INR30,000 crore-INR50,000 crore given its domestic and international network, technical manpower, prime slots, parking bays, besides being a historic brand. “Air India is still the most visible brand out of India despite having taken a hit over the years because of various issues,” says a government official aware of what is happening with the sale process. According to him, it would take over a decade to create an international airline of this size and magnitude from scratch.
"We know that it can be easily be turned around in private hands, which is why we are keeping a 24% [stake] to encash later," said this official. "It will be a major airline like British Airways or Singapore Airlines once it is run professionally."
This will happen in a market which is growing in double digits and is expected to continue on that trajectory for many years. We do have a recent comparable from the defunct Kingfisher Airlines brand, which was valued at INR4,100 crore by Grant Thornton in 2011-12, although RBSA Advisors in 2013 found the valuation to be around INR200 crore. The matter is under investigation by government agencies as the Vijay Mallya-run airline owes about INR9,000 crore to state-owned banks.
Chetan Shah, a senior independent merger and acquisition adviser who worked with Lazard, the Tata group, banks in West Asia, and has been an adviser to the government’s earlier strategic disinvestment projects, says, “Air transport is a complex business with wafer-thin operational leverage. This means you will go right only if you execute really well every time, but [you can] go wrong quite easily.
"The best practice to follow in an acquisition, especially in an industry dotted with several loss makers, is to vet all possible bleeding wounds with a magnifying glass and have a management team that knows how to extract value. Valuations will be driven by hard-nosed global infrastructure and aviation investors, who are a must inclusion in any consortium led by a successful operator.”
Given the scale of financial and operational challenge here and the nostalgia or prestige associated with owning Air India, all buyers will need more details on the following factors to refine and make their bids more accurate. These will be in the following areas
Fleet size and market share
Positive: 138 planes (62% owned)
Negative: Gaining lost share
International landing rights
Mostly positive with peak-hour slots, network routes, and bilateral agreements
Employee expenses
Positive: Employee cost as a proportion of revenues has reduced lately; very experienced work force
Negative: Cost of voluntary retirement scheme will be high
Debt
Negative: High levels of debt
Real estate
Positive: real estate rights to exist for two years
Negative: Will bidder need to find new real estate/lease agreement with a government special purpose vehicle?
While bidders would convert their narratives to valuations based on clarity that the government provides on the areas of concern, they will
1. look at a realistic-going cash flow analysis
2. assess the upper estimate based on the liquidation value of assets
3. contrast the figures with the current market multiples to get a true valuation picture. It may not be a single deal value but structured as a fixed as well as variable-payment schedule.
Bidders will need foreign tie-ups and less debt
While we do not know yet if any of the deal terms could be revised, let’s assume the deal goes ahead. The next question is: Who could be the bidder?
From a purely size point of view, airlines such as British Airways, Singapore Airlines, Lufthansa, Cathay Pacific, Qatar Airways, and Emirates look attractive (revenue greater than INR50,000 crore and EBITDA margins greater than 5%). Given the 49% foreign-bidder cap, we feel that Indian airlines alone may not take the bait. However, they could be part of a global consortium partnering with not just the foreign airline, but also, possibly debt-restructuring companies and in some cases, even non-airline companies.
Keeping Air India afloat has required debt infusion. Deal terms suggest that the INR33,000 crore debt would be passed on to the bidder. That is about 65 times earnings before interest and tax (EBIT). The issue is not how high this debt is. It is how many airline companies globally can service this debt and would there be some restructuring of this debt before the deal. According to Aviral Jain, managing director, Duff and Phelps, “The industry is operating at about five to six times debt/EBITDA. With Air India’s current 19x debt/EBITDA and financing cost of about 11%, the bidder needs to have a strong balance sheet (zero to low debt) to fund the transaction and refinance the high-cost debt to manage the profitability in future. This may be difficult to achieve without the backing of a foreign airline or a strong financial institution that has access to a much lower cost of funds.”
British Airways, Singapore, Emirates, and Lufthansa again qualify along with some of the Indian companies. Fact is, we believe, a deal could be on the table, for the right bidder. For interested foreign bidders, this could be the only way to currently enter one of the most dynamic global markets, India.
Airlines divestments are not easy
Different methods of full and part privatisation/disinvestment have been tried out across countries. According to ET Prime’s analysis, almost 33 Airline disinvestments have been attempted but only about nine have come through. So it is not an easy thing to sell.
Countries in Western Europe, such as the UK, France, and Germany, have tried the IPO route, providing access to private funds. A few countries in Europe, such as Portugal, Finland, Sweden, Denmark, and Norway, have still retained government control while privatising their airlines. Privatisation has also been tried successfully in Japan and Canada. In other parts of Europe, a strategic sale method has been tried with some Eastern European countries still waiting for their strategic partners.
Conversely, there are also models of successful government-controlled airlines as we can see in China and West Asia. And there are stories of failures in privatisation/disinvestment ranging from Hungary to Kenya, Argentina, and Sri Lanka, which have seen multiple changes in ownership stakes and sometimes, even bankruptcy and closures. While individual country situations differ, one common factor across successful privatisations in Japan, Canada, and the UK was that the government gave up control after the disinvestment.
What does this mean for the Air India disinvestment? According to CAPA, Centre for Aviation, while locally tailored solutions are necessary, “two requirements for a successful privatisation are a track record of profitability and no government interference in the running of the airline. The latter is particularly important as the prospect of encountering industrial unrest after investing billions of dollars is undoubtedly a deterrent. In addition, bidders will require a formal commitment from the government that it will not interfere in management of the airline despite retaining 24% equity.”
Giving up control is hard for governments. India is no different and that would really need to be addressed if Air India is to be made great again.
Air India brings to mind an image of a debt-laden airline failing to find a suitor. For a carrier with a large fleet, peak-hour slots, superb network of flights, and global agreements, is that the right perception? Beyond the obvious is an airline worth much more than it is perceived to be. ET Prime brings to you the first-ever attempt to value Air India.
Debleena Majumdar
8 Jun 2018
Price is a number — a fact. Valuation is a story — a narrative.
Usually the seller works out such things, but as the first part of our story pointed out, the government has so far been unable to do that for Air India.
With no bidder lining up, it might seem that Air India isn’t coveted. Truth be told, there is a school of thought that would agree to it.
In 2012, the government gave a struggling Air India a INR30,000 crore bailout package. While it helped improve metrics, the airline failed to reach targets outlined in its turnaround plan. It has been losing customers, is laden with debt, and the nostalgic Maharaja branding is almost anachronistic.
Having said that, smart acquirers will value it for
What it could be
Its effect on the competition
The assets and privileges such as landing rights
ET Prime posed this question to Duff and Phelps, the investment banker and valuation expert: “What is Air India worth?”
A two-step attempt at valuing Air India
Duff & Phelps analysed the trading valuation multiples for domestic and foreign airlines. The implied median value ranged between INR21,280 crore and INR35,688 crore based on comparable companies’ enterprise value(EV)-to-revenue and EV/EBITDA multiples. This estimate is just based on a comparison of relative comparables. There are other detailed methods of valuation such as intrinsic valuation and contingent-claim valuation.
Meanwhile, the government expects the airline to be valued at INR30,000 crore-INR50,000 crore given its domestic and international network, technical manpower, prime slots, parking bays, besides being a historic brand. “Air India is still the most visible brand out of India despite having taken a hit over the years because of various issues,” says a government official aware of what is happening with the sale process. According to him, it would take over a decade to create an international airline of this size and magnitude from scratch.
"We know that it can be easily be turned around in private hands, which is why we are keeping a 24% [stake] to encash later," said this official. "It will be a major airline like British Airways or Singapore Airlines once it is run professionally."
This will happen in a market which is growing in double digits and is expected to continue on that trajectory for many years. We do have a recent comparable from the defunct Kingfisher Airlines brand, which was valued at INR4,100 crore by Grant Thornton in 2011-12, although RBSA Advisors in 2013 found the valuation to be around INR200 crore. The matter is under investigation by government agencies as the Vijay Mallya-run airline owes about INR9,000 crore to state-owned banks.
Chetan Shah, a senior independent merger and acquisition adviser who worked with Lazard, the Tata group, banks in West Asia, and has been an adviser to the government’s earlier strategic disinvestment projects, says, “Air transport is a complex business with wafer-thin operational leverage. This means you will go right only if you execute really well every time, but [you can] go wrong quite easily.
"The best practice to follow in an acquisition, especially in an industry dotted with several loss makers, is to vet all possible bleeding wounds with a magnifying glass and have a management team that knows how to extract value. Valuations will be driven by hard-nosed global infrastructure and aviation investors, who are a must inclusion in any consortium led by a successful operator.”
Given the scale of financial and operational challenge here and the nostalgia or prestige associated with owning Air India, all buyers will need more details on the following factors to refine and make their bids more accurate. These will be in the following areas
Fleet size and market share
Positive: 138 planes (62% owned)
Negative: Gaining lost share
International landing rights
Mostly positive with peak-hour slots, network routes, and bilateral agreements
Employee expenses
Positive: Employee cost as a proportion of revenues has reduced lately; very experienced work force
Negative: Cost of voluntary retirement scheme will be high
Debt
Negative: High levels of debt
Real estate
Positive: real estate rights to exist for two years
Negative: Will bidder need to find new real estate/lease agreement with a government special purpose vehicle?
While bidders would convert their narratives to valuations based on clarity that the government provides on the areas of concern, they will
1. look at a realistic-going cash flow analysis
2. assess the upper estimate based on the liquidation value of assets
3. contrast the figures with the current market multiples to get a true valuation picture. It may not be a single deal value but structured as a fixed as well as variable-payment schedule.
Bidders will need foreign tie-ups and less debt
While we do not know yet if any of the deal terms could be revised, let’s assume the deal goes ahead. The next question is: Who could be the bidder?
From a purely size point of view, airlines such as British Airways, Singapore Airlines, Lufthansa, Cathay Pacific, Qatar Airways, and Emirates look attractive (revenue greater than INR50,000 crore and EBITDA margins greater than 5%). Given the 49% foreign-bidder cap, we feel that Indian airlines alone may not take the bait. However, they could be part of a global consortium partnering with not just the foreign airline, but also, possibly debt-restructuring companies and in some cases, even non-airline companies.
Keeping Air India afloat has required debt infusion. Deal terms suggest that the INR33,000 crore debt would be passed on to the bidder. That is about 65 times earnings before interest and tax (EBIT). The issue is not how high this debt is. It is how many airline companies globally can service this debt and would there be some restructuring of this debt before the deal. According to Aviral Jain, managing director, Duff and Phelps, “The industry is operating at about five to six times debt/EBITDA. With Air India’s current 19x debt/EBITDA and financing cost of about 11%, the bidder needs to have a strong balance sheet (zero to low debt) to fund the transaction and refinance the high-cost debt to manage the profitability in future. This may be difficult to achieve without the backing of a foreign airline or a strong financial institution that has access to a much lower cost of funds.”
British Airways, Singapore, Emirates, and Lufthansa again qualify along with some of the Indian companies. Fact is, we believe, a deal could be on the table, for the right bidder. For interested foreign bidders, this could be the only way to currently enter one of the most dynamic global markets, India.
Airlines divestments are not easy
Different methods of full and part privatisation/disinvestment have been tried out across countries. According to ET Prime’s analysis, almost 33 Airline disinvestments have been attempted but only about nine have come through. So it is not an easy thing to sell.
Countries in Western Europe, such as the UK, France, and Germany, have tried the IPO route, providing access to private funds. A few countries in Europe, such as Portugal, Finland, Sweden, Denmark, and Norway, have still retained government control while privatising their airlines. Privatisation has also been tried successfully in Japan and Canada. In other parts of Europe, a strategic sale method has been tried with some Eastern European countries still waiting for their strategic partners.
Conversely, there are also models of successful government-controlled airlines as we can see in China and West Asia. And there are stories of failures in privatisation/disinvestment ranging from Hungary to Kenya, Argentina, and Sri Lanka, which have seen multiple changes in ownership stakes and sometimes, even bankruptcy and closures. While individual country situations differ, one common factor across successful privatisations in Japan, Canada, and the UK was that the government gave up control after the disinvestment.
What does this mean for the Air India disinvestment? According to CAPA, Centre for Aviation, while locally tailored solutions are necessary, “two requirements for a successful privatisation are a track record of profitability and no government interference in the running of the airline. The latter is particularly important as the prospect of encountering industrial unrest after investing billions of dollars is undoubtedly a deterrent. In addition, bidders will require a formal commitment from the government that it will not interfere in management of the airline despite retaining 24% equity.”
Giving up control is hard for governments. India is no different and that would really need to be addressed if Air India is to be made great again.
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