Sahara valuation haunts Jet again

The Rs 2,300 crore deal will be costlier by 40%, the amount of fall in Jet's share price.

BANGALORE: Vijay Mallya must be grinning from ear to ear as the Jet Airways -Air Sahara deal tries to clear the last hurdles. No matter what happens - whether the takeover goes through or gets further stuck - Jet chairman Naresh Goyal (pictured) is unlikely to emerge from it unscathed. If he wins, he acquires a sinking airline at high cost.

Mallya said Jet was paying too much for the acquisition. If he loses, it's months of effort down the drain. Mallya gets another booster, for he has used Goyal's distraction with the takeover to focus on improving Kingfisher's marketshare.

At the time of going to press, TV news flashes suggested that Goyal may get Intelligence Bureau security clearance to head the Air Sahara board. CNBC said the Sahara group had refused feelers for price cuts, saying it was confident about running the airline if the deal did not finally get the government's nod.

On Tuesday, scuttlebutt ruled - that Jet is walking out on the deal on account of valuation fears - though Jet itself clarified late on Tuesday that it was awaiting the regulatory nod. Analysts were quick to the refrain: Jet was better off without Sahara.

The market would certainly agree, for the Jet share has lost 41% of its market value since the deal was announced. Nikhil Garg of Edelweiss Capital says in the present market condition, when Jet could not leverage its share value, the deal value will prove exorbitant. "The airline would be paying a higher equity cost (it will have to sell more shares to raise the deal money) than what it would have done in January, when it entered into the deal."

Garg said since January, the valuation of Jet has fallen by 41%, and as Sahara's price was based on Jet's valuation, the deal would be costlier by that much. The Jet share is down from Rs 1,133 in January to Rs 671 on Tuesday.

Another aviation analyst from a foreign broking firm justified the high valuation as a premium that Jet was paying for severing the "excess baggage" (losses) that it would have otherwise inherited with the acquisition.

"I would like to take a neutral stance as I do not have the whole information. Whether Sahara's buyout would result in value accretion is to be seen.  The issue here is not valuation, but the general market condition, which is in a shambles. It wouldn't be long before some of the airlines may run out of funds and fold up or go on the block. A shakeout in the industry is imminent," said the analyst.

Talk is, Jet profit is already under tremendous pressure due to competition (declining margins) and high operational costs (mainly soaring jet fuel prices). So it has to weigh its options even if the deal goes through.

In all this, it is Sahara which will take the biggest beating. Analysts say that if the deal falls through some crack or the other, it will be difficult for Sahara to survive in an industry where competition has heightened. Analysts said it would be difficult for the airline to get a reasonable valuation in the current market.

For Jet, the market leader, the current scenario leaves it with little choice but to take advantage of its dominant position to dictate pricing, which otherwise a market leader could easily determine in any other market. This is because of a confluence of new players who have entered with deep pockets and are willing to burn money in the short term.

"There are two possibilities - either it would go bankrupt, sold dirt cheap to Kingfisher or some other promoter, or Jet would force it to trim its current price," says an analyst.

An industry source said that even if Sahara decides to continue to operate the business on its own, Jet and Kingfisher now know the airline inside out and would know how exactly to fight it to death.

Meanwhile, the market is already abuzz with the rumour that Sahara has initiated talks with a woman entrepreneur from the corporate communications industry who's shown interest to set up an airline in the domestic aviation sector.