Sunday, November 01, 2020

Air India disinvestment

Air India's disinvestment- or, more accurately, privatisation- is stlll on after having been started in January, 2020. (An earlier attempt in 2018 proved unusccessful). 

After contemplating a majority stake sale initially, the government decided to sell 100 per cent of equity in Air India at one go. According to media reports,  it has also moved about half of the debt out of Air India to a Special Purpose Vehicle. The debt that remains is around Rs 23,000 crore and this is said to relate to the aircraft bought by AI.

Neither of these has sufficed to attract bidders thus far. The government, it is reported, is now offering a further sweetener. It has allowed bidders to choose how much of the existing they would like to take up in making their offers for equity.

I must confess I am not able to fathom what this means. 

Let us take V =D +E, where V is the value of the firm, D is the debt and E the value of equity.

Bidders will estimate a value for V. In bidding for equity, they will subtract D from V. If they want to take up less debt, they will bid more for equity; if they want more debt, they will bid less. I guess that is the proposition being made.

But this holds true only if V remains unchanged with the change in debt. I can't see how this is possible. Most of the debt in AI relates to aircraft. If some of the debt is to moved out, some of the aircraft too will have to go. When that happens, V drops correspondingly, leaving E unchanged. 

Can somebody explain to me how leaving it to bidders to choose the level of debt is going to help?

There is another thought. If moving out debt is going to make AI more attractive, that is, it will improve the bottomline, why can't the government keep AI? After all, the presumption underlying disinvestment is that AI will continue to bleed, that is why it's important for the government to get AI off its hands.

One final point. It is important that the government realise the correct value for AI assets, however the deal is structured. If the sale is under-priced, there is little incentive for the bidder to improve efficiency- the bidder gains without having to lift his little finger. Secondly, if AI is not correctly priced, the deal could invite a legal challenge, which would mean that it will be stymied for quite some, leading to a further worsening of performance.

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