Jet Airways (JET.BO)
Etihad Airways to Acquire 24% Stake in Jet Airways
Etihad Airways to invest ~US$380m in Jet Airways — to purchase 24% stake (post
money), at a ~32% premium to CMP. Jet has approved the issuance of 27.26m shares
to Etihad Airways at a premium of Rs744.74/sh. Etihad’s investments in Jet Airways will
total ~US$600m, which includes US$70m paid for Jet’s slots at Heathrow and another
US$150m for a majority equity stake in Jet’s frequent flyer programme ‘Jet Privilege’
(pending approvals, to be completed over the next 6 months).
A textbook transaction for Etihad — Acquiring minority stakes in airlines is
somewhat consistent with Etihad's philosophy – over the past few years it has acquired
stakes in: Aer Lingus (2.99%), Air Berlin (29.2%), Virgin Australia (9%). These stakes
typically foster a closer working relationship – code sharing, joint marketing initiatives –
and appear to be part of Etihad's strategy to augment its international presence.
Critical for Jet on several fronts — A) Liquidity and solvency - Cash infusion of
~US$450m gives Jet the leeway to pay down high cost debt – we factor in interest cost
savings of ~Rs1.9bn pa, as Jet repays ~US$300-400m of high cost debt. B) Capital
structure – The cash infusion effectively recapitalizes Jet; D/E falls to ~4x. Interest
coverage ratio forecast to rise to 1.8x in FY14 (1.2x in FY13). The perception of Jet’s credit
quality should improve, given Etihad’s backing. C) Strategically – this deal could alter the
complexion of Jet’s international business: i) If Jet were to hub at Abu Dhabi instead of
Brussels (our conjecture), it could effectively utilize its 777 fleet to fly point to point services
to the United States, a critical market from which Jet has almost withdrawn from given cost
pressures. ii) Jet could uplift fuel for its int'l long-haul operations at Abu Dhabi, reducing fuel
costs. iii) Both carriers have the flexibility to continue with existing code sharing agreements.
New TP of Rs766 — is based on 8.5x Sept 14E EV/EBITDAR (roll forward from Sept
2013) and is based on post money estimates. EPS increase reflects interest cost savings.
We haven’t forecast cash infusion for the Jet Privilege transaction. Nor do we forecast
any synergy benefits with Etihad (fuel cost savings, cost savings by shifting hub from
Brussels to Abu Dhabi, etc). For detailed forecasts, see our note on 7 Aug'12 Jet Airways
(JET.BO) - Upgrade to Buy: Not Yet a 747, But a 545 Key risks: Delays in the transaction.
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