Report on acquisition

Of Air Sahara by
Jet Airways

Submitted to - Submitted by -
Dr. Shounak Chowdhury (Group – 5)
Gaurav Sharma

Manish Sharma
Peeyush Sharma

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Contents

INTRODUCTION:.................................................................................3

HISTORY:............................................................................................3

Indian Aviation Industry:....................................................................3

Jet–Sahara deal:.................................................................................5
Viewpoint of Jet Airways:................................................................6
SWOT ANALYSIS:...........................................................................6
Viewpoint of Air Sahara –................................................................8

Conclusion –.......................................................................................8

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INTRODUCTION:

"Pleased to announce the execution of a share purchase agreement for acquisition by Jet
Airways India Limited of the entire capital of Sahara Airlines”

This was the joined statement released by Mr. Naresh Goyal, chairman Jet Airways and Mr.
Subroto Roy, Sahara Group chairman at a press conference immediately after putting pen to
the deal.

HISTORY:

Sahara Airlines was established on 20th September, 1991 and began its operation from on 3rd
December, 1993. On 3rd October, 2000 Sahara Airlines was rechristened as Air Sahara. Earlier it
was a domestic carrier but on 22nd March, 2004 it became an international carrier with flights
between Chennai and Colombo, capital of Srilanka. It was a major part of Sahara India Pariwar.

Jet Airways was founded by Mr. Naresh Goyal on 1st April, 1992 and it started its operations
from 5th May, 1993. Its major hub is Chatrapati Shivaji International Airport, Mumbai. It was
initially a domestic carrier but it became an international carrier in 1994 with its flight between
India and Srilanka. Presently it has the largest market share in Indian Aviation industry.

Indian Aviation Industry:

12th April is the main date in the history of Aviation of India when two main private
carriers made acquisition deal . It was followed with another mega merger between Air
India and Indian Airlines which is country’s 2nd national carrier. Undoubtedly this clearly
projects that Indian Aviation industry is jumping into the critical phase of consolidation –
since the state monopoly is already removed in the year of 1990, now sparking cut-throat
competition in the very lower price sector that has wiped the major profit margins and

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 ultimately giving the opportunity to common people to FLY. In order to stabilize the fares
and also improving the efficiency of the aviation market , the cutting trend consolidation
started by most famous Air India and Jet is likely to ultimately improve the long run
prospects of the carriers that finally emerges from the main process. However, despite
hidden logics of master minds, the main success of this trend is with no guarantee. Both
these deals are showing net result benefit for airlines as margins can be recovered. But
undoubtedly both Air Indian and Jet are facing challenges.

Indian Aviation Industry was undergone through unprecedented booming in its history
and is growing affluence has fuelled demand for flying travel among India special ling
target of middle class.

In year 2006 the numbers of passengers of domestic fly increased by more than 30% to
reach 33million only approx. 1% of Indian population fly by air, there was plenty space for
future aspects. It can be expected that the number of air travellers to at least double
5year. This boom to fly had led to a profound path for airline- as of March India had 13
carriers and most of them were waiting for govt. approval to begin with their operations.
Intense competition is for sure and evaporating profits. Domestic Airlines are for sure
playing at lesser profit. Major players in this industry are –

 Jet Airways
 Indian Airlines
 Kingfisher Airlines
 Air Sahara
 Air Deccan
 SpiceJet
 Indigo

Among these Indian Airlines is public company and rest all are privately owned. Also, Air
Deccan, Spicelet, Indigo are low cost carriers.

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 Market Share of Airlines in India is given below –

Jet–Sahara deal:

Jet Airways at first attempted to buyout Air Sahara on 19th January, 2006 offering them around
$500 million in cash. Most people were thinking that the deal is highly overvalued as Air Sahara
is not worth that much. Indian Aviation industry also gave its approval. But somehow this deal
was cancelled due to disagreements over price. Also other major reason for its failure was the
appointment of Jet airways chairman Mr. Naresh Goyal to the Air Sahara board. After the
failure it became a pride issue for both the companies and they both filed lawsuits over each
other seeking damages occurred to the reputations of both. This would further delay the return
of Rs.500 crores which it had advanced to Air Sahara.

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Second major attempt to acquire Air Sahara was made on 12th April, 2007 and Air Sahara
accepted it. It was a cut price deal and an out of court settlement which was around 40%
cheaper than the earlier one. Reason for it was earlier was a share price purchase agreement
and all the assets of Air Sahara would have been part of Jet. Hence as a result of finalization of
this deal Jet will pay Air Sahara Rs 400 crore on or before 20 th April and Rs. 550 crore in four
equal interest free installments between march 2008 and march 2011. Also Sahara will keep Rs.
500 crore paid by Jet at the time of earlier agreement as part of deal. All the shares of Air
Sahara will be transferred to Jet Airways.

This price was significantly lower than the valuation estimated by Ernst and Young hired by Air
Sahara. They valuated Air Sahara at around $1 billion. Air Sahara at the time of acquisition
carried around Rs. 150 crores of liabilities but Mr. Naresh Goyal at a press conference stated Jet
is not accountable for all these liabilities and thus it won’t be transferred to its balance sheet.
But cricket sponsorship of Air Sahara would remain with Sahara only.

Viewpoint of Jet Airways:

Jet airways even though was still the largest in terms of market capitalization but its market
share was beginning to erode. Its profit margins were going down due to high expenses and
lack of synergies. It still couldn’t enter into the booming low cost carriers business as its fleet
was not that large. So main options in front of them were either to increase its infrastructure or
go into merger and acquisitions. Later of these was looking more feasible at that time.

SWOT analysis of the deal between Jet airways and Air Sahara is as follows-

SWOT ANALYSIS:

Strengths -

 Market share of Air Sahara is around 12.5 % and of Jet Airways is 35-40 %. Thus this deal
would further increase market share of Jet Airways. Expectations were around 50%.

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  Jet’s current fleet strength is 63 and Air Sahara’s is 27. Hence it would increase the fleet
strength of Jet Airways and then they could widen their network.
 Also it would help in creating economies of scale. Since business would expand.
 Air Sahara has a strong presence in neighboring countries to India such as Srilanka,
Nepal, Bangladesh and Thailand.
 Availability of the parking slots in major national as well international airports which is
very costly.
 Availability if skilled workforce of Air Sahara i.e. pilots, air hostesses, crew members and
other personnel.

Weaknesses –

 Air Sahara was constantly losing its market share, thus how would they retain its market
share under a new brand.
 Many employees were not happy with this acquisition and hence question of their
loyalty will arise.
 Jet’s profits were down by 53% in 2005-06. So difficulty in arranging the funds was a big
deal.

Opportunities –
 Enter into low cost carrier market by completely or partially diverting the resources
gained from purchase of Air Sahara to form a low cost carrier brand.
 Create more synergies through cross-utilization of staff and infrastructure.

Threats –

 Potential merger of Air India and Indian airlines and thus competition from public sector
in aviation industry
 Price warfare.
 Also Jet won’t be able to concentrate more on international market due to shortage of
funds as most of them is spent on the deal with Air-Sahara.
 Workforce would go up to 10,000 which is difficult to maintain and thus downsizing is
certainly needed which could create a negative impact on employees.

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Viewpoint of Air Sahara:

Air Sahara was surely among the weaker players in the Indian Aviation industry with a market
share of only 12.5%. Also balance sheets of Air Sahara was not looking very good as it was
constantly making huge losses and unless a big step is taken it would go down further and
further. Also its shares were not performing very brightly either. There were huge liabilities
both long term as well as short term and its aircrafts were also on lease or on loan. Not much
option was left for them other than a merger or an acquisition. Hence, it was an attractive and
an easy bailout for Air Sahara from the aviation industry.

Conclusion :

After considering the present state of both Jet airways and Air Sahara and also keeping in mind
the current scenario in Indian Aviation industry this acquisition was a good decision taken at the
right time. This move will further strengthen the position of Jet in Indian Aviation industry and
also provides opportunities to new market segments. For Air Sahara also it’s an easy bailout
option. They can recover their money and invest it in other businesses of Sahara India Parivar.

Thus, this deal is good for Aviation Industry as a whole also.