At its board meeting yesterday, Deccan Aviation approved a preferential allotment to the UB group at a price of Rs165 per share. The proposed pricing is in accordance with SEBI guidelines on preferential allotments. This is the second private sector aviation deal in India following the revival of the on-again off-again takeover by Jet Airways of Air Sahara in April.
In the latest deal, the UB group will pay Rs1.5 billion in advance to Deccan, with the balance paid upon receipt of necessary approvals. The agreement specifically states that in the event approvals are not received, the advance will be returned û perhaps to pre-empt a situation like the Jet Airways takeover of Air Sahara, which was ostensibly stalled on account of non-receipt of approvals.
Pursuant to the acquisition of a 26% stake and the change in control of Deccan, the UB group will make an open offer to shareholders of Deccan to acquire up to another 20%.
The structure achieves dual objectives for UB's owner Vijay Mallya û he gains control of Deccan and most of his outlay is invested in Deccan to augment its coffers. Deccan is not profitable and for the most recent quarter ended March 31, 2007 it made a loss of Rs2.1 billion. It is speculated that the quantum of loss is what made the company realise it needed to induct a strategic investor with deeper pockets. Sources close to the deal say private equity firm TPG and Anil Ambani had also looked at investing in Deccan.
The move makes Mallya the largest aviation player in India with a market share estimated at between 35%-40%.
At this stage, Kingfisher and Deccan will continue to operate independently. Kingfisher will continue to target the upper end of the market, an area where it has very quickly earned a loyal following, while Deccan retains its positioning as a budget carrier. The CEO of Air Deccan, Captain GR Gopinath, will continue to run the company while Vijay Mallya will don the vice-chairmanÆs hat.
Rumours that Kingfisher would take over Air Deccan have been circulating in India since mid-April. Mallya was earlier said to be in the fray for Air Sahara but he was not willing to pay as aggressively as the owners demanded.
The deal corroborates the view of industry experts that the aviation industry in India is poised for consolidation. When the aviation sector was opened to private players earlier this decade, a number of companies entered the fray, attracted by estimates that the Indian market would grow to 60 million passengers by 2010. Currently, eight carriers operate in the country. However, running an airline requires patience and constant investment. Players like Sahara and Deccan are realising this the hard way.
This is MallyaÆs second M&A deal this fortnight. On May 17, Mallya announced he had finally sewn up the acquisition of ScotlandÆs Whyte & Mackay for ú595 million ($1.18 billion).
Boutique investment bank Edelweiss Capital brokered the Deccan deal.