Etihad Airways, the national airline of the United Arab Emirates (UAE), has agreed to acquire a 24% stake in Indian carrier Jet Airways for about US$380 million. The deal with Abu Dhabi-based Etihad is the first since the government permitted foreign airlines to acquire up to 49% of the equity of scheduled and non-scheduled air transport services in September 2012.
Prior to the reforms, foreign direct investment (FDI) in civil aviation was permitted by foreign entities other than airlines and airlines could only invest in non-passenger air transport services such as cargo airlines.
After months of intense negotiations, Etihad agreed to subscribe for 27,263,372 new shares in Jet Airways at a price of ₹754.74 (US$14) per share. The deal is subject to various conditions and regulatory approvals.
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The balance of Etihad’s US$600 million overall strategic investment in Jet comprises a US$70 million purchase and leaseback of Jet Airways’ three pairs of Heathrow Airport landing and take-off slots, which was announced in February. In addition, Etihad will invest US$150 million in Jet Airways’ frequent flyer programme, Jet Privilege, subject to regulatory and corporate approvals and final commercial agreements which are expected to be completed in six months.
Jet Airways will need to alter its shareholding structure prior to the tie-up with Etihad. The Indian airline is currently 80% owned by Naresh Goyal, a non-resident Indian (NRI), through Tail Winds, an Isle of Man-registered company. The remainder is held by public shareholders.
Tail Winds was considered an “overseas corporate body”, an entity that the Reserve Bank of India has done away with. Investments by such bodies are now viewed as foreign holdings, which means Goyal must ensure his stake is transferred to him as an NRI (since NRIs are permitted to invest 100%) in order to facilitate Etihad’s investment.
Rohan Shah, the managing partner at Economic Laws Practice and co-counsel to Jet Airways, told India Business Law Journal that the key issues were creating a structure that would comply with the aviation guidelines, FDI rules, Securities and Exchange Board of India requirements and Reserve Bank of India rules.
Division of control and decisions regarding participation, veto rights and investor protection were also complicated. “We had a past precedent to go by where we could get input from regulators and others in the legal community,” said Shah. “Somewhere in the near future they will actually define that control. That has been an ongoing debate. Obviously people have approached that with caution and you tend to be more conservative than aggressive because you don’t want to get that wrong.”
The Etihad-Jet partnership will create new India-Abu Dhabi routes, a Gulf gateway for flights to the US, Europe, Africa and the Middle East, and a combined network of 140 destinations. The infusion of capital from Etihad will also help Jet Airways enhance its services from its primary hubs of Delhi and Mumbai and introduce new flights from Hyderabad and Bangalore.
Goyal, who has opposed FDI in civil aviation in the past, said he believed foreign participation would “result in the improvement of the economics of aviation, grow traffic at our airports and create job opportunities”. Etihad Airways CEO James Hogan said that the Indian market is “fundamental to our business model of organic growth partnerships and equity investments”, and that the UAE carrier would work with Jet Airways “and their stakeholders to build a sustainable, competitive and profitable airline”.
Many believe Etihad’s investment will spur other foreign airlines to explore targets in India’s aviation industry. “We needed one big deal to hopefully catalyse interest again,” said Shah. “One of the initial constraints was the fact that the FDI regime was not supportive and what was on offer was just not interesting enough. Now that [it is] more supportive, the other constraint, of course, remains whether Indian airlines can be invested in.”
Shah said the civil aviation sector could see one or two other transactions with potential investors actively considering at least two airlines. Indian airlines are equally seeking foreign tie-ups to increase their competitiveness in the domestic market.
Rustam Gagrat, the managing partner at Gagrats, advised Jet Airways on the deal along with partners Haseena Tapia Shahpurwalla and Uma Nagarajan, senior associate Arpana Dhariwal, and associates Khanjan Jasani and Divya Maghan. Shah was co-counsel to the airline and its promoters. Jet Airways also took on senior counsel Harish Salve to assist with the negotiations and Ernst & Young to help with due diligence. The Indian airline’s financial advisers include Credit Suisse and DSP Merrill Lynch.
DLA Piper acted as Etihad’s international legal counsel. The team of advisers was led by partners Jon Hayes and Benjamin Parameswaran, as well as legal director Ciaran Stone. Partner Mark Franklin advised on the regulatory aspects of the transaction, Alexandra Kamerling and Jan Dreyer looked after competition law issues and Graham Tyler and Sarah Day advised on the finance arrangements. Amarchand Mangaldas Mumbai-based managing partner Cyril Shroff, competition partner Nisha Uberoi and project finance partner Santosh Janakiram were Etihad’s India counsel. HSBC and PriceWaterhouseCoopers assisted with due diligence and competition aspects of the deal.
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