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Deal a win-win situation for Jet Airways: Experts

Tuesday, April 10, 2007

Though the news of the takeover of Air Sahara by Jet Airways is yet not official, in all probability, it is a struck deal . Nine months after calling it off, Jet Airways is understood to have negotiated a takeover of Air Sahara, at a much lower price than the $500 million (Rs.2300 crores) offered in January 2006.

But financial analysts are divided in their opinions about whether the deal will elicit long term benefits.

They feel that the merger would strain the profitability and the balance sheet of Jet Airways in the near to medium term, before the merger can fully realize the benefits arising out of the synergies.

However, they are unequivocal in their opinion that the deal is a real steal for Jet Airways.

“Win-Win Situation” for Jet Airways

Jet Airways is likely to benefit out of this deal in more than one ways.

According to Ganesh Shanbhag, Promoter, SMS Financial Services P. Ltd., “This is a win-win situation for Jet Airways. The take-over has propelled Jet Airways into the Top-500 companies in India. But importantly, this (the deal) will enable Jet to ply over a broader expanse, making it a pan-India network without phenomenal additional investments in logistics and infrastructure. Given that Air Sahara operated of several routes that were different from those of Jet’s, Jet Airways need not make any duplicated investment. Only a sprucing up of the Air Sahara fleet would suffice.”

While Jet's competition with Air Sahara has been absorbed through this deal, Air Sahara's performance had been lagging, so this deal augurs well for both, opines Upendra Kulkarni, Fortress Financial Services Ltd.

But Gaurang Shah, Geojit Financial Services, has a different take. Though not as optimistic about the deal, he thinks that Sahara too had something to gain. “Sahara’s aircrafts were aging and its cash flows were stressed.”

Not all Issues resolved

There are several issues that have aroused a sense of caution for analysts like Shah.

The changes in the ATF (Aviation Turbine Fuel) prices or a further rise in crude oil prices may exert immense pressures on the margins earned by players like Jet. Shah doubts if they can sustain it.

The decision whether the possession and ownership of Air Sahara’s infrastructural facilities will go to Jet, still has to be taken by the DGCA (Directorate General of Civil Aviation). The dry and wet lease agreements and the corresponding tax liabilities also need to be considered, adds Shah.

Long Term

According to experts, Jet Airways may see competition from new regional airlines, and in the short term it may feel the pressure.

Surbhi Chawla, Research Analyst at Angel Broking says, “Jet Airways has started feeling the pressure of the overall competitive environment. As on Dec’2006, Jet Airways and Air Sahara both reported running in losses and lost a significant market share after the deal was announced. Thus, at the current valuations been indicated, we believe the merger would strain the profitability and the balance sheet of jet Airways in the near to medium term, before the merger can fully realize the benefits arising out of the synergies”.

But Shanbhag feels that such situation was estimated from before. However, he maintains his stance that both the players of the deal have gained.

“On its part, Jet can now have an option of entering the ‘economy’ sector by utilising Sahara’s fleet for those purposes, which was a sector unexplored by Jet. Else, it can continue to ply as a ‘Premium’ player as it always has. So it’s a best of both worlds for them.”

And probably, this optimism has induced the investors too. Jet Airways scrips were up on both, the Sensex Rs 644.85 (0.11 %), and Nifty Rs. 645.40 (0.23 %) at the market-close on Tuesday.

The talks between the two companies are taking place through an arbitration channel. Its arbitration order is expected on Wednesday, 11th April 2007.

Posted by FR at 9:05 PM  

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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.