JET ETIHAD DEAL

SECTORIAL CONDITIONS : PRE-DEAL

Sectorial Conditions :

• The Indian Aviation Industry had been going through a turbulent phase over the past several years facing multiple
headwinds - high oil prices and limited pricing power contributed by industry wide over capacity and periods of
subdued demand growth.
• Challenges - high debt burden and liquidity constraints – high parking charges – functioning charges at airport.
• Most operators needed significant equity infusion to effect a meaningful improvement in their balance sheet.
• In the Pre deal era, the Indian domestic carriers had reported a combined loss of US$ 1.6 billion for the financial year
2012-13 with more than 40% of the loss accounted during the last quarter.
• Jet airways reported quaterly loss of Rs 891 crore pre-deal.
• On standalone basis, Jet airways posted an operating loss of Rs 432 crore. It had reported an operating profit of Rs 318 crore in
the same period firm’s total operating expenses increased by annual 21%. Emirates, Etihad and Qatar Airways are the three key
players in the sector in UAE. Etihad ranks second in UAE after Emirates and the market share of Qatar airways has declined over the
years. In 2013, Emirates had 36.8 per cent of total market share of UAE and Etihad was stagnant at a pitiable 9.2 per cent
• The liberalization in Foreign Direct Investment (“FDI”) in domesti c passenger airlines and the exit of Kingfisher Airlines
from the market provided encouragement to other domesti c players to accelerate their market presence.
• The FDI policy was revised in September 2012, Jet and Etihad entered into negotiations early in August itself. Etihad had
a first mover advantage, and the Jet-Etihad deal became the first investment by foreign airline to invest in an Indian
airline. By moving first, it seemed Etihad would be able to get a major share of the outbound passengers from India
 FEATURES OF BUYING AND TARGET COMPANY – ETIHAD & JET
AIRWAYS
ETIHAD AIRWAYS
Introduction • National airline of UAE. One of the fastest growing
airlines in the history of commercial aviation.
• Received the award for World’s Leading Airline at the
World Travel Awards for the past 5 years
Business Details • Operates more than 1000 flights per week to over 120
passenger and cargo destinations
Products • Core activity of passenger transportation
• Etihad Holidays: Division that offers a comprehensive
range of holiday packages to the airline's destinations.
• Etihad Cargo: Offers a range of cargo services linked to
its expanding international route network and aircraft
fleet.
Services • Diamond First Class
• Pearl Business Class
• Coral Economy Class
JET AIRWAYS
• Founded in 1993
• 2nd largest airline in India by 1996 in India both
in terms of market share and passengers carried
• Number 1 company in Indian Aviation sector by
2002
• Fleet size of 116 Jet Airways serves 47 domestic
destinations and 22 international destinations
• Core activity of passenger transportation
• Jet Konnect: Low cost brand of Jet Airways. To
close down loss making routes and divert the
planes to more profitable routes.
• Jet Lite: Acquisition of Sahara Airlines. Low cost
carrier.
• First Class
• Premiere
• Economy Class
 FEATURES OF BUYING AND TARGET COMPANY – ETIHAD & JET
AIRWAYS
ETIHAD AIRWAYS JET AIRWAYS
Financials • FY 2014 : Net profit of US$ 73 million on total revenues of • Incurring losses over the years.
US$ 7.6 billion. • FY 2011 : Only year in which the company
• Up 52.1 per cent and 26.7 per cent respectively over the posted a profit.
previous year • FY 2014 : Loss of US$ 3.66 million on total
• EBITDAR and EBIT up by 16.2 per cent and 32.5 per cent revenues of US$ 17.22 million.
respectively
• Etihad Cargo became a billion dollar company in 2014
HR Policies • Staff travel Benefits. • Staff travel, Layover Allowance &
• End of service Benefits. Insurance benefits
• Excellent free Private Medical Insurance. • October 2008: Laid off 1900 employees.
• Accidental and Live Insurance Benefits. Employees were later asked to return to
• Meal Allowance during layovers. work. This resulted in loss of INR 200
• Company provided accommodation or a generous crores
accommodation allowance. • Short sightedness of the HR Managers of
the company

Competitive Features • 195 interline relationships and 49 codeshare partnerships in • Code sharing partnership with 17 airlines
place with airlines such as Air France, Air New Zealand, Air including Etihad Airways, Air Berlin, Air
Canada. Canada
 DEAL ATTRACTIVENESS & REASONS FOR THE DEAL

Etihad Airways Jet Airways Jet + Etihad

Available Seat Kilometers (ASK) 61 Billion 43.5 Billion 104.5 Billion
Revenue US$4.8 Billion US$3.5 Billion US$8.3 Billion
Destinations 88 77 140
Fleet Size 73 109 182
Passengers 10.3 Million 21.6 Million 31.9 Million
Average Revenue Per Passenger $466.02 $201.39 $260.19
Frequent Flyers 2.O Million 2.4 Million 4.4 Million
Employees 14500 13135 27635
 DEAL ATTRACTIVENESS & REASONS FOR THE DEAL
ETIHAD Perspective
• Introduction of new routes
• Tap into one of the fastest growing aviation markets in
the world, where air travel is forecast to triple by 2021
• Development of Abu Dhabi as a option to Dubai(CCA)
• Access to 23 Indian cities via code share agreement
• Joint purchasing of spare parts
India & UAE agreements :-
• Bilateral air service agreements – 26th Feb 2014
• Interests of foreign and Indian carriers, airports, consumers
and tourism industries
JET AIRWAYS Perspective
• Introduction of new routes
• Struggling with losses
• Debt of more than 13000 Crores
• Saving of Rs 230 crore in interest costs annually
• Fuel at cheaper rates. Cost savings : 8% Approx.
• Access to Etihad’s wide European network via code
share agreement.
• Joint purchasing of spare parts
• First mover advantage in Indian aviation sector – Open
Sky Policy & FDI in Aviation Sector
 JET ETIHAD DEAL FINANCIAL INCLUDING VALUATION
• Etihad Bought Stake -Jet Airways - Valuing the Jet Market Cap at USD 1.2 Billion ( Rs 7000 Cr).
• First India Company Take Benefit From New FDI Policy for Air Line Sector.
• Jet Airways- Two Segment- Domestic Unprofitable- International Turned Profitable.
• Company Debt- USD 2.1 Billion (10328 Cr) Out of 75% for owing Aircraft -25% for Working Capital
Requirement.
• The airline plans to pay back this debt through sale-lease back of the aircrafts. The company can pay back
all of its loan by sale-lease back model in next 5 years.
• Through this analysis, Jet Airways can be a debt free airline and has the ability to generate free cash flow –
Niche Market in International travel Market - it is sustainable.
• Jet - EBITDA of $352 Million -international operations – FY13. EBITDA - proxy for free cash flow -The
international segment grow rate 4-5% - global growth rate in international traffic -The valuation of
international segment of Jet airways- equal to $3.1 B based on free cash flow analysis.
• According to 2012 KPMG report On multiple basis - the airline transaction multiple-EV/EBITDA is 11.3 times
- international segment - valued at 11.3 x $352 M = $3.9 B.
 JET ETIHAD DEAL FINANCIAL INCLUDING VALUATION
• The current enterprise valuation of Jet airways between $3.1 to $3.9 B. Out of this valuation, removing the
current debt of $2.1 B then the market capitalization of Jet Airways should be $3.1 B – $2.1 B = $1 B~5900
Cr.
• The 2.73 Cr shares represent a 24% stake in Jet Airways' fully-diluted equity capital. At 24%, the Abu Dhabi-
based airline will not have to make the mandatory open offer for Jet.
• According to SEBI Rules, A Buyer Acquiring a 25% stake in a listed company will have to make an open offer
to the shareholders of the target company, and the minimum stake that the acquirer can own after the open
offer is 51%. However, the government of India allows foreign airlines to own only up to a 49% stake in
Indian carriers.
• Deal Price: Rs. 754.74 per share - Offer Price Premium: 31.55 % premium Market - Price: Rs 573.85 (BSE)-Rs
573 (NSE) - Shareholders Valuation: Rs 610-640
• Deal Valuation – Jet Airways- Rs 8574 Cr. Jet dealing mounting debts and entered into the partnership to use
Etihad’s cash to pay debt and get global partner.
• As part of the deal, there will be an overall cash infusion of $ 750 million in debt and equity. The infusion will
help Jet cut its debt from $2.1 billion to $ 1.5 billion
 JET ETIHAD DEAL FINANCIAL INCLUDING VALUATION

• $379 Million – Equity Investment

• $150 Million – Investment in Jets Frequent Flyer Programme
• $150 Million – Assistance to be provided in Securing Debt
• $ 70 Million – Sale & lease – Back of Jet’s Heathrow Slots.
• Accordance with The Securities Contract (Regulation) Rules, 1957 - amended in 2010 -provide for a minimum
public shareholding (“MPS”) of 25% for listed companies in the private sector.
• Shareholding pattern post the deal:-
 SYNERGY
Excess of Indian aviation market
• Better regional connectivity.
• Roots & network optimization.
• Increase Passenger & Cargo revenue.
Cost Efficiency
• Fuel cost.
• Aircraft maintenance cost.
• Selling & Distribution cost.
Code-share agreement
• The deal get jet access to 14 new destination & Etihad get access to 88 new destination.
• The deal get Jet access to Etihad’s wide European market.
 SECTORIAL CONDITIONS –POST-DEAL
• On the whole, after the deal, Jet seems to be losing its foothold in the international sector, which was its strong point
even when its domestic operations running up massive losses.
• Travel agents also seem to be sensing Jet's weakening position on international routes and have shown some reluctance
in accepting the target of 50 per cent higher international sales in 2015 set by the airline.
• The two airlines have been code-share partners since 2008 and their relationship was strengthened in November
2013, after Etihad Airways received approvals to acquire a 24 per cent stake in Jet Airways, marking it the first
investment by a foreign carrier in India's airline industry. The deal helped Jet to infuse cash $750 million, which helped
cut its debt
• In addition it has been able to refinance its debt through lower cost funding. It also benefits from scale economies in
procurement right across the board. They continue to explore collaborative purchasing opportunities for fuel, spare
parts, insurance and technology support
• Jet Airways has been ruling in the domestic sector and among the top contenders and preferred airlines post deal.
• The wide-ranging partnership has numerous advantages for travelers, including enhanced connections across the
world through an expanded codeshare agreement, reciprocal 'earn and burn' rights and tier level recognition on the
Jet Privilege and Etihad Guest frequent flyer programs.
 LEGALITIES AND LEGAL ISSUES ASSOCIATED
1. FIPB Approval (14th June 2013) –
• Violation of effective control policy.
• Revised proposal Submitted.

  Fixed Directors Nomination committee Total Control

  Old New Old New Old New
Promoters 4 28.57% 4 33.33% 2 20.00% 4 40.00% 48.57% 73.33%
Etihad 3 21.43% 2 16.67% 3 30.00% 1 10.00% 51.43% 26.67%
  7 50.00% 6 50.00% 5 50.00% 5 50.00% 14 12

• Shares of Tailwind should be transferred to NG.

  Original Stake Before Deal Stake After Deal Stake

Tailwinds 79.99% 0.01% Etihad 24%
Naresh Goyal 0.01% 67.10% Naresh Goyal 51%
M.F. and Other 20% 33% Public shareholding 25%
• All Amendments in deal will be subject to Indian Govt.
2. SEBI Approval (1ST OCTOBER 2013) –
• Open Offer Threshold - Takeover Code
• Reserves the right to declare Etihad as promoter

3. CCEA Approval (3RD OCTOBER 2013) -

• Equity Inflow more that 12000 million INR

4. CCI Approval (12TH NOVEMBER 2013) –

• Obligation - Etihad has joint control over Assets and Operations
• SEBI Served Show Cause Notice ( SCN)

5. SEBI Denied the CCI Obligation based on below point –

• Etihad does not have any rights in Target Co - nominee 2/12.
• Definition of Control in Takeover code in different than CCI.
• Promoters right are reserved with Jet.
• Etihad Does not provide services in India - No Competition.
• Acquirer cannot be a Person acting in concert for Target Company.
6. Ministry of Civil Aviation –

• Approval from DGCA for the candidate of Etihad appointed in Board of Jet.

Other issues associated

 Controversy around the BASA ( Bilateral Air Service Agreement )-

• Subramanian Swamy writes to PMO

• Allegation - the BASA was compromised for Deal.
• PMO defends the Abu Dhabi Bilateral.
 RESULTING ENTITY PERFORMANCE (POST DEAL)

 FROM JET’s PERSPECTIVE

1. Reduction of interest payments on the outstanding debt.

• Jet had debt $2.1 billion as of Dec 2012 and paid $167 million interest annually.
• Retired some debt with capital infused by Etihad
2. Provision of low interest loans to Jet.
• Etihad’s provided loans to Jet at lower rates, prior to the deal Jet paid 14% interest annually.
3. Benefit of Code Share Agreements.
• marketing arrangement in which an airline places its designator code on a flight operated by another airline, and sells
tickets for that flight.
• Jet got access to 14 other cities and this surged the traffic by 93%.
4. Advantage of leveraging Etihad’s international presence.
• In Europe, Etihad flies to 17 destinations. This gives Jet exposure to European market.
5. Fuel cost savings
• About 8-10% cost benefit due to flights halting at Abu Dhabi.
 RESULTING ENTITY PERFORMANCE (POST DEAL)

 FROM ETIHAD’s PERSPECTIVE

1. Access to Indian Market.

• Helped Etihad increase their market share as Emirates had 13% and Etihad had 2%.

2. Increase in number of flights.

3. Substitute for competitor.

• Deal helped Etihad provide a substitute hub to passengers at Abu Dhabi against Emirates Dubai

4. First mover advantage

• First investment by foreign airline in Indian airlines.

 RESULTING ENTITY PERFORMANCE (POST DEAL)

 MIXED BENEFITS
1. Utilization of aircraft.
• Wide body aircraft for longer routes and narrow body aircraft for nearby locations.
2. Cater to large number of destinations collectively
• Jet – 72 destinations, 20 international.
• Etihad – 84 destinations
• Post Deal – 140 destinations
3. Change of Gauge Facilities to Indian airlines
• UAE agreed to provide change of gauge facility for Indian aircrafts at Abu Dhabi without changing flight number
4. Joint purchasing of fuel, spare parts etc.
5. Passengers travelling by either of the airlines enjoyed benefits of the Privilege program of other airline.
6. Helped in marketing efforts – Sponsored Mumbai Indians in IPL
THANK YOU