of

Aviation Industries
ITM Warangal PGDM-09-11

Presented by :PRAKASH BARNWAL

The Indian aviation industry is one of the fastestgrowing aviation industries in the world with private airlines accounting for more than 75 per cent of the sector of the domestic aviation market. With a compound annual growth rate (CAGR) of 18 per cent and 454 airports and airstrips in place in the country, of which 16 are designated as international airports.

 With an increase in traffic movement during December 2009 and increase in revenues by almost US$ 21.4 million, the Airports Authority of India seems set to accrue better margins in 2009-10, as per the latest estimates released by the Ministry of Civil Aviation. This is being primarily attributed to increase in the share of revenue from Delhi International Airport Limited (DIAL) and Mumbai International Airport Limited (MIAL). Passengers carried by domestic airlines from JanuaryFebruary 2010 stood at 80,56,000 as against 67,61,000 in the corresponding period of 2009 a growth of 19.2 per cent

Genesis of the Indian Airline Industry

1932: Mr. J.R.D.TATA flies a De Havilland Puss Moth from Karachi to Bombay as part of the first Tata Sons Ltd. flight to deliver mail carried by British Imperial Airways 1948: Govt. of India acquires 49% stake in Tata Airlines, designates it a flag carrier and renames it Air India International (AII) 1953: Jawaharlal Nehru, in friendly transaction, convinces the Tata Group to let the Govt. of India acquire a majority stake in AII and nationalizes air transport 1953: Indian Airlines formed by merging eight former independent domestic airlines

Contd
1960: India enters the jet age with an Air India B707; USA and India are connected for the first time with an Indian airline 1989: Indian Airlines becomes one of the first airlines to induct the A320 into its fleet 1990: East West Airlines becomes the 1st private airline since 1953

Crowding the Skies

1948-1953

1991-1993

2003

2005-2006 2007

KINGFISHER AIRLINES
Kingfisher Airlines is a private airline based in Bangalore, India. Currently, it holds the status of India's largest domestic airline, providing worldclass facilities to its customers. Owned by Vijay Mallya of United Beverages Group, Kingfisher Airlines started its operations on May 9, 2005, with a fleet of 4 brand new Airbus - A320, a flight from Mumbai to Delhi to start with. The airline currently operates on domestic as well as international routes, covering a number of major cities, both in and outside India

Air Deccan
Simplifly Deccan is Indias first low-cost airline. It was founded and operated by Deccan Aviation Ltd. by Captain Gopinath in 2003 with regular scheduled flights from Bangalore to Mangalore and Hubli. When it started its operations, Deccan was known popularly as the common man's airlines. Continuing this trend even now, Simplifly Deccan sells air tickets for as low as 500/even now, minus the taxes

Factors which influence mergers

Globalizing competition Financial circumstances prevailing in the market Decreasing the strength of the industry Bringing about integration in the industry Effecting changes in the technology used De-regulation

 Reasons why these take place

The factors that must be taken into consideration when an organization decides to go for a merger takeover or an acquisition

How these benefit the organization

How various departments of an organization are affected

Factors that must be taken in to consideration

When two organizations decide to merge a new legal entity is formed . Therefore all assets and liabilities are combined; hence forth the financial status of the merger must be looked at. Legal issues of the organization must be looked at seriously.

Kingfisher airlines took over Deccan airlines

G.R. Gopinath, Chairman, Deccan Aviation Ltd (right), and Mr Vijay Mallya

The primary reason here was to expand business and reduce competition.

Contd..
Legally if an airline wants to operate overseas it must have a domestic status of having operated for 5 yrs and therefore in case of kingfisher operating overseas becomes easier. In a business of passenger transport there are many government duties and taxes. Therefore the sector is becoming unviable with heavy losses and with global recession even worse.

Final Merger Deal

Rationale Behind M&A

From the Kingfishers Point of view - To start overseas business(May 2005) - For the expansion purpose - Survive from the losses (577 Crore loss) From the Air Deccans Point - To make the profit & overcome losses (418 Crore loss)

Economies of M&A

1) SYNERGY
a)Operational Synergies Kingfisher and Air Deccan have exactly the same fleet of aircrafts & the same equipment's (engines, brakes , etc.) This provides a huge opportunity on saving in engineering and maintenance cost.

Contd
b) Infrastructure Synergy . Kingfisher and Air Deccan are now using 65 airports, of which more than 28 are common to both. The new entity will have over 71 aircrafts (41 Airbus aircrafts and 30 ATR aircrafts). This will have air travel for all fares and all kinds of people. Offer the maximum number of 537 daily flights in 69 cities. Synergy benefits arising from a common fleet of aircraft.

Contd

2) Fast Growth:
- It is the inorganic growth. - King Fisher wanted to fly overseas. - Wanted to have profits in the books.

Type Of Merger
Horizontal Merger - Competitive company.

Reverse Merger - Air Deccan merged in Kingfisher.

Forms of corporate Restructuring

Merger
- Mr Vijay Mallya and Mr. G.R. Gopinath agreed on merger vested upon the best interest of both the companies.

Strategic Alliance
- They had joined their hand to achieve the profitability in the two company and certain other objectives like to fly overseas.

Strategy for the Acquiring Firm

Strategic Alliance They had joined their hand to achieve - Profitability - For price competency - Expansion

Tender offer
Vijay Mallya paid an additional Rs 418 Cr for a further 20% stake through an open offer.

Overview of aviation Industry in India

Market share pre merger
Jet airways

Market share post merger

jet airways
jet lite kingfisher Spice jet Paramount airways Indigo airline go air

Jet lite
11% 18% 0% Air deccan 24% spice jet 8% 4% 9% 1% 11% 14% Paramount airways indigo airlines Go air kingfisher airlines 9% 1% 11%

other
1% 18% 22% 8% 30%

LOSS
Out of cash

Rs 418 Cr

Rs 577 Cr
Limited to domestic airlines

Kingfisher Air Deccan merger Rs 550 CR

SWAP ratio Kingfisher 7

Air deccan

26% stack

Note:- Based on Market price, net asset value and discounted cash flow (By KPMG & Dalal shaw)

Enterprise value of Air Deccan:- Rs 2115 cr

Offer price

Details of acquisition per fully paid up Rs. 155/- per fully paid up Rs. 155/equity share equity share
Nil Nil

Share holding of Acquirer and PACs before the Public Announcement (P.A.): Shares acquired by way of Preferential Allotment purchases (No & %) Shares acquired in the open offer (No & %)

35,222,231 (25.97%)

35,222,231 (25.97%)

27,126,360 (20.00%)

27,126,360 (20.00%)

Size of the open offer (No of shares multiplied by offer price per share)
Shares acquired after P.A. but before 7 working days Post offer share holding of acquirer Pre & Post offer share holding of Public

Rs. 4,204,585,800

Rs. 4,204,585,800

Nil 62,348,591 78,247,067And 51,120,707

Nil 62,348,591 (45.97%) 78,247,067 and 51,120,707

 Cash Paid = Rs.550Crs + 418Crs = Rs.968Crs Present Value of 46%stake = 62316254.28*137.5 = 856.85Crs Cost for kingfisher = Cash Paid-Present Value = 968-856.85 =Rs.111.15Crs.

Rs 300-400 Cr

Operation synergy Infrastructure synergy Investment synergy Route synergy

Changes in Stock Prices

Prices 50 100 150 200 250 300 350 0

Changes in Stock Prices

Stock Prices of Deccan Aviation

1/11/2007 2/11/2007 5/11/2007 6/11/2007 7/11/2007 8/11/2007 9/11/2007 12/11/2007 13/11/2007 14/11/2007 15/11/2007 16/11/2007 19/11/2007 20/11/2007 21/11/2007 22/11/2007 23/11/2007 26/11/2007 27/11/2007 28/11/2007 29/11/2007 30/11/2007 3/12/2007 4/12/2007 5/12/2007 6/12/2007 7/12/2007 10/12/2007 11/12/2007 12/12/2007 13/12/2007 14/12/2007 17/12/2007 18/12/2007 19/12/2007 20/12/2007 21/12/2007 26/12/2007 27/12/2007 28/12/2007 31/12/2007

Kingfisher acquisition of Deccan under lens

The Ministry for Corporate Affairs (MCA) has issued a show-cause notice to the acquirer (UB Group) for non-compliance with the provisions of the Companies Act. The Act prescribes that if post-acquisition the market share of the two entities combined exceeds 25 per cent the corporate concerned needs prior approval of the Union Government,. The official said that the notice was issued by the southern region field office of the Ministry.

The broad terms of the shareholders agreement are proposed to include

Reconstitution of Board Directors Management: Chairman Mr. Vijay Mallya Vice Chairman Mr. Gopinath Tag along Rights: Subject to applicable law, the acquires shall have the right to proportionately tag along at the time of the sale of 5% or more of the fully diluted shareholding in the target company in any single transaction by the Promoters.

Kingfisher & Air Deccan- Merger Advantage

The fresh equity capital will allow the Deccan to pay the loans & to fund various infrastructure projects. Reduction of cost by sharing infrastructure The merger ensures that Kingfisher does not need to invest more in infrastructure or in spare planes, thereby reducing costs and increasing profitability. The combined share of the two carriers will increase the Market share. As per the existing laws Kingfisher Airlines would not be able to operate on international routes until 2010. However Air Deccan would be eligible from the second half of next year as its five-year ceiling is coming to an end.

CONCLUSION
Its a capital intensive industry, With few scale efficiencies, Within a partly regulated infrastructure, Free market entry Price competency This was the right decision to merge for achieving all of the above objectives.