Jet: Bankers Kick Goyal Out, And The Can Down The Road, But Face Steep Haircut

The Jet Airways deal pushed by the State Bank of India (SBI) and other banks is largely about kicking the can down the road so that the airline does not go down in flames while a general election is on. Under the plan, promoter Naresh Goyal and his 24 per cent foreign partner Etihad exit the management and banks obtain a temporary majority while they look for a buyer.

The controlling stake shifts to a consortium of banks led by SBI, who will pay all of Re 1 a share when the market values Jet shares at around Rs 270 (12 noon quote, 26 March). The sharp 15 per cent jump in the share price after the announced exit of the Goyals from the board means nothing when all that the deal has achieved is a temporary postponement of the death penalty, but with another Rs 1,500 crore of debt added to Jet’s existing load of Rs 8,000 crore.

While SBI Chairman Rajnish Kumar is clear that the banks are not there forever, the reality is that he has two months in which to find a new owner for Jet, an owner who is willing to take as much of the existing debt as possible. So, when he talks of selling Jet to whoever offers the highest value, what he essentially means is sale to whoever gives banks the lowest possible haircut.

The implications of the deal are thus clear.

One, the Goyals are gone forever, unless they manage to get a new buyer who will take on the largest burden of the debt – an unlikely prospect given that Goyal had more than a year to find such a White Knight. The existing White Knight, Etihad, is happy to cut his losses and run.

Two, whoever takes over Jet will not take over the entire debt. This means banks will take a steep haircut, maybe even as high as 50 per cent. The problem with Jet, as Kumar pointed out in an interview to The Economic Times, is that an airline essentially has no assets that can be sold easily. The only assets are the brand name (but that did not give the bankers to that hapless airline any great consolation), a few planes that may be owned (but which may have loans pending against them), some landing slots at airports, and a frequent flyer programme whose value may depreciate if the airline does not regain its market share fast.

Three, there are only three logical buyers for Jet – a foreign airline that wants to control domestic routes to feed international traffic, and is willing to do this with a 49 per cent stake; a domestic business house that is willing to invest in Jet and make it viable through high equity infusions, and an existing domestic airline that is willing to undertake a difficult merger. Only SpiceJet or Vistara look like potential partners domestically, though foreign airlines seem likely to show interest now that the Goyals and Etihad are out.

Rajnish Kumar has bought time, but at a steep price. The banks will ultimately pay heavily for this rescue. But they may have had no choice, since the only other option was to lose even more with the Goyals in the cockpit.