Air India divestment is more important for government than for buyers

As reported by this paper on Monday, the divestment of Air India has hit a roadblock. Some of the conditions for the proposed divestment are making it tough for perspective bidders to decide on whether they should enter the fray. One bothersome condition demands that if a prospective buyer who has made a winning bid is already in the airline business, the buyer must keep the operations of Air India at arm’s length from its existing airline operations.

It is easy to be incredulous about this condition. Are policy makers under the impression that a steel or cement maker will bid for Air India? Moreover, a company in the airline business will make a bid only if it believes that it can save cost by bringing in synergies with its existing operations and the ones it is taking over. Globally, before takeovers, cost synergies are worked out in detail and, in fact, synergies are the main reason for takeovers. There is no reason why a similar approach should not be followed by Air India bidders.

From the government’s point of view, it is understandable that it would like to protect the value of its 24 per cent stake. However, it is absurd to assume that saving costs and increasing value by bringing in synergies would lead to a decline in the value of the government stake. Actually, it would be the other way round, for such a move would increase the value of Air India because cost efficiency would be reflected in the balance sheet of Air India, which means the value of the residual stake would also go up.

Our policy makers should understand that Air India divestment is more important for the government than for the buyers. The state carrier makes a loss of about Rs 3,000 crore almost every year. So, to offload a perennially loss-making entity that has no hope of revival, it has go in for divestment. Another issue lacking in clarity pertains to the government’s timeline for selling its 24 per cent stake in Air India. The government is keeping it in the hope that while it might sell its 76 per cent stake at a lower price, an increase in value of its 24 per cent stake will improve the its average realisation. However, it is uncomfortable for a private player to deal with a situation where the government has a stake and can possibly interfere in the working of the airline.

What the government needs to do is come out with clear-cut guidelines, and set a time frame for selling its remaining stake to a successful bidder. Now, another conflict may arise in order to ensure that the valuation of 24 per cent stake does not go way beyond limit. The airline’s new owner may decide to keep accounting policies such that profits remain subdued. Given the laws in our country, this is not tough to do. In order to bring clarity both for the bidder and for itself, the government should announce a timeline for divesting its residual 24 per cent stake.

This can be offered to the existing owner or it could be done in the open market. We are of the view that it should be done in the open market because it would mean that for the new owner, there would not be any incentive to follow accounting policies which front load the cost and push down the profit. This is because of fact that when valuations are good at the time of an IPO even the new owner would be a gainer. In order to achieve this, the government will not only have evaluated prospective bidders in terms of financial bids but also their track record of running an airline in an efficient manner.