Tata Sons board urges Chandra to proceed cautiously on Jet deal: Report

Although Tata Sons last week confirmed that the Group is in preliminary talks with Jet Airways over a possible takeover of the beleaguered airline, its board is reportedly in no hurry to seal the deal. The investment holding company of the $103-billion salt-to-software conglomerate is instead advocating a cautious approach.

People in the know told The Economic Times that some Tata Sons board members urged Chairman N. Chandrasekaran and his team to appoint external consultants to aid in the due diligence process and make it as comprehensive as possible amid concerns of a jump in the Naresh Goyal-promoted airline's liabilities. The board needs to ratify any investment of more than Rs 100 crore by group companies under its Articles of Association.

"Many board members have suggested to the management to be cautious and not to rush to do the deal," said a source, explaining that a preliminary report is expected in a few weeks. "The board will discuss the due diligence report and will later take a call." The board met last Friday to discuss investing in Jet Airways, and a possible takeover.

Given the state of affairs at Jet Airways, the person added that two external agencies will be appointed [for the due diligence] apart from the in-house team of the Tatas. The cash-strapped airline reported its third consecutive quarterly losses for the quarter ending September, and is currently scrambling for funds to tide over a liquidity crisis that has resulted in delayed payments to some vendors and salaries to a 15% of its over 16,000 employees.

"While Ratan Tata is keen on aviation business, he is not keen on a deal at any cost," another source told the daily, pointing out that the Group would have gone ahead with the Air India deal, where the guarantor was the government, had that been the case. "Jet is not a bad airline but we have to be careful of risks involved with the deal and asses the cultural fit between the two airlines.''

Media reports last week suggested that Tata Sons was mulling a two-step deal, where Jet could merge with Tata SIA Airlines Ltd - the joint venture between Tatas and Singapore Airlines that's known by the brand name Vistara - through a share swap in the first phase, followed by Singapore Airlines buying out the Goyal family's entire 51% stake in the new combined entity.

The deal certainly has a lot going for it where both parties are concerned. It would strengthen the Tata Group's position in the aviation business, likely elevating it to India's second biggest airline operator after IndiGo in terms of market share, and third-largest in terms of fleet size. With Jet under its fold, the Tata Group-owned airlines, including AirAsia India, would reportedly have a combined market share of 23.6%, up from 8.2% as of September, as compared to 43.2% for IndiGo.

On the other hand, Jet Airways would bag a life vest. Analysts predict a worrying outlook for the airline unless it manages to find a strategic investor. According to a recent note by Edelweiss Securities, Jet Airways is "set to lose market share as it lacks the financial muscle to exploit robust domestic passenger growth". Moreover, yield pressure is unlikely to abate in the near term as IndiGo continues to push for market share. "In the absence of a fund infusion/divestment, Jet Airways may default on the upcoming debt repayment," the note read, adding, "However, the entry of a strategic buyer may alleviate some of these concerns in the near term."

Earlier this month, in a post-earnings call, Jet Airways had said that it is at various stages of discussions with multiple "interested parties" for capital infusion and partial stake sale in its loyalty programme Jet Privilege. Although various private equity firms, including Blackstone and TPG, had submitted bids for the frequent flier programme, the negotiations didn't advance much. So, much depends on the outcome of the talks with the Tatas.

On Sunday, the airline left hundreds of passengers stranded at the Mumbai international airport after it cancelled 10 domestic flights due to operational issues. Meanwhile, Civil Aviation Minister Suresh Prabhu yesterday virtually ruled out the possibility of a bailout package for the airline.

"For a private airline, it is for the board of directors and their management to ensure that the airline functions properly, that (they) have to take appropriate measures depending upon market conditions that will prevail from time to time," Prabhu said without directly mentioning Jet Airways. A senior official told PTI that the ministry has also decided not to intervene with respect to the airline's request for more time to pay dues to airport operators.

With PTI inputs