Disinvestment: Story of Maharaja
According to Investopedia, Disinvestment means the action of selling any asset/subsidiary by an organization or government. It is usually done by Central, State or Public Sector Enterprises. It is undertaken mostly to reduce the fiscal burden or to raise money for meeting specific needs like bridging the shortfall of revenues etc.
Many a time, Privatization and Disinvestment are considered to be a synonym. Let’s clear that confusion first.
Understand the Privatization:
Privatization occurs when a government property becomes the property of a private entity. It simply means a transfer of ownership and management from the public sector to the private sector. It mostly happens when more than 51% of the shareholding of the government is transferred to private hands.
Understand the Disinvestment:
Disinvestment refers to a strategy of selling off or liquidating the assets owned by the government or the organization. The main purpose is to cover up the losses such as loss from NPAs, fiscal losses etc.
The key difference between Privatization and Disinvestment is that in Privatization, the government sell more than 50% of its shareholdings whereas, in the case of disinvestment, shareholding less than 50% is sold by the government.
Now let me take you to the story of Air India Disinvestment.
Initial Stage:
At the initial stage, the government had an offer of 76% disinvestment. At a later stage, it decided to part with a 100% stake in Air India and Air India Express. Soon, they started receiving responses from the bidders. The government had already mentioned that the bids will be accepted at enterprise value instead of equity value.
The enterprise value consists of equity value + Debt + Cash.
Terms and Conditions:
Here are the main conditions set by the government for the sale of Air India:
Any private limited company, public limited company, limited liability partnership or body corporate is eligible to invest in the state-owned airline provided such parties obtain applicable statutory approvals.
For submitting EOIs and for being considered for subsequent qualification, a bidder should have a minimum net worth - the aggregate value of the paid-up equity share capital and all reserves - of Rs 3,500 crore. In the case of LLP, the net worth should be calculated as the aggregate value of partners' capital and all its reserves.
The notification says that bidders must agree to assume the debt apart from other liabilities, and that debt worth Rs 23,286.5 crore would remain with Air India and Air India Express at the time of the disinvestment. The remaining debt would be allocated to Air India Assets Holding Limited.
As part of the strategic disinvestment, Air India would also sell 100 per cent stake in low-cost airline Air India Express and 50 per cent shareholding in joint venture AISATS, as per bid document issued on Monday. "As a part of the disinvestment, 100 per cent equity stake in AI along with AI's 100 per cent equity stake in AIXL and AI's 50 per cent equity stake in AISATS is being disinvested by the Government of India," the notification added.
Management control of the airline would also be transferred to the successful bidder.
AI has interests in other entities (Air India Engineering Services, Air India Air Transport Services, Airline Allied Services and Hotel Corporation of India) which are in the process of being transferred to a separate company -- AIAHL and will not be a part of the Proposed Transaction. AISATS, which is an equal joint venture between Air India and Singapore Airlines, offers ground handling services. Besides, Air India has interests in Air India Engineering Services, Air India Air Transport Services, Airline Allied Services and Hotel Corporation of India.
The bidding mechanism
The government followed the reserved price mechanism. It means it had set the benchmark price, below which it could not accept the bid. This price has to be set after considering various aspects such as cash flow projections, brand value, asset valuations etc.
In this case, the reserved price was Rs 12906 Crore. Of course, the winning bid of the TATA was Rs 18000 Crore. It included a cash component of Rs 2700 Crore and a debt component of Rs 15300 Crore.
The risk factor:
There were many risks associated with Air India. They were:
The system
Negative net worth
Customer support segmentation
However, the X factor is still the human resources involved in Air India and Air Express. Air India has around 12,085 employees and Air Express consisting of 1434 employees. All of them will be retained by TATAs and it has to be paid VRS in the scenario of sacking off.
TATAs seems to be very positive regarding its employees!
Another alarming factor may be the anti-monopoly watchdog of the CCI i.e. Competition Commission of India. However, the market shares will play important role in the assessment of the post-merger entity.
Financials at a glance:
Resources: