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Jet Airways employees' bailout offer: No harm in trying because buyer apathy in any case stares at banks

S Murlidharan
Embattled Jet halted all flight operations indefinitely on 17 April after its lenders rejected its plea for emergency funds

A group of Jet Airways employees, who had earlier offered to take over the distressed airline, met SBI Caps officials on Thursday to discuss the proposal. SBI Caps is overseeing the bidding process of Jet Airways. SBI Caps told the Jet Airways employees that their proposal would be considered only after conclusion of the bidding process.

Representatives of the Society of Welfare for Indian Pilots (SWIP) and Jet Aircraft Maintenance Engineers Welfare Association (JAMEWA) were part of the meeting, which occurred even as speculation was rife over the lack of interest among the shortlisted bidders to take over the airline. State Bank of India Caps (SBI Caps) had last month shortlisted four bidders €" Etihad Airways, TPG Capital, Indigo Partners and National Investment and Infrastructure Fund (NIIF). The bidders have to submit their final bids by 10 May.

Jet Airways employees fancy themselves as the new promoter offering to buyout the grounded airline with a capital of Rs 7,000 crore. Out of this, Rs 3,000 crore would be brought by undisclosed (angel?) investors. The remaining Rs 4,000 crore would be equity subscribed to immediately but paid for in future through future earnings. Desperate times call for desperate measures. But such desperate measures should not be outlandish or laughable.

One has heard of securitisation €" loans being raised on the security of receivables often spanning ten to fifteen years €"common in mortgage business. Investors show interest because EMI default is rare and in any case the value of the mortgage asset is normally good enough to take care of default. The only time securitisation failed was in 2008 when the American mortgage market bubble burst.

For employees to offer their future labour as present capital is bound to elicit derision. How will the claims of creditors of Jet Airways with SBI-led banks' consortium itself being owed Rs 9,000 crore be settled? Can the creditors be comforted by woolly notions and sentimentalities bordering on the unworkable? Rs 3,000 crore to be brought in by undisclosed investors would barely scratch the surface of the problem. Indeed, as SBI Caps pointed out enormous liabilities are coming in the way of attracting potential suitors.

Corporate world is not unaware of management buyout which is a variant of leveraged buyout. Leveraged buyout (LBO) stands for the acquirer borrowing on the strength of the acquired company's balance sheet to pay off its existing shareholders to take the company private.

Tata Steel's acquisition of the Anglo-Dutch steel major Corus was of this genre. Unfortunately for Jet Airways employees, there is nothing to leverage with the grounded airline's net worth in the negative. That Jet Airways employees cannot bring in substantial cash is evident from their plaintive plea to accept their future salary in the form of stock options accruing during the next five years as quid pro quo for such allotment of shares.

It is one thing to offer shares to employees for the services already rendered but quite another to do so in anticipation of services. What is the guarantee they would stay put? And during these five years, how would they survive with a meager cash salary with substantial part of the salary being in the form of stocks.

The writing is on the wall for SBI Caps. Unless it persuades Etihad to bring in the much-needed cash with fresh capital infusions, there is no hope in hell for the harried SBI-led banks to recover their dues. They are nursing both investments and loans. Both can go sour if Etihad cold shoulders the new promoter role. And why Etihad alone out of the four short-listed? Because it already has a substantial stake €" 24 percent. It is a strategic investor. Its relationship with Jet Airways was win-win.

It might not have earned substantial returns from its investments in Jet Airways but it gained a lot in turns of passenger revenue on its international operations emanating from Abu Dhabi via India through Jet Airways. Prime Minister Narendra Modi, who enjoys tremendous goodwill with UAE rulers, can do his bit by persuading the Abu Dhabi royal family to bring Etihad around.

Etihad is government-owned. Abu Dhabi Investment Authority (ADIA) is also a formidable Sovereign Wealth Fund with about $828 billion of assets. The two can combine to bail out the grounded Jet Airways though the sovereign wealth fund itself would be more demanding for obvious reasons €" unlike Etihad it is not Jet Airways' strategic investor.

Meanwhile, the cloying sentimentality of Jet Airways employees should not be allowed to delay the rehabilitation of the crisis-hit airline.

(The writer is a senior columnist and tweets @smurlidharan)

Also See: Jet Airways issues gag order over 20,000 employees, cautions talking to media will affect bidding process

Bombay HC refuses to intervene in Jet Airways crisis, says it cannot ask govt, RBI to release fund

Jet Airways shares plunge 22.5%, hit 1-year low amid reports hint at lack of interest among bidders to follow up EoI

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