Is Jet's Sahara buy worth it?

The street has made no secret of its unhappiness with the Rs 2,300-crore price offered by Jet Airways for buying Air Sahara. Reports of the deal falling through led to Jet’s price rising by a small margin on Tuesday, despite equities declining. Analysts were worried about Jet getting stretched by the buyout.

The main reasons why Jet wanted to acquire Sahara — market share, infrastructure and landing rights — still hold true. Sahara may have lost market share, but the emergence of rival airlines would mean that all established players would have suffered on this front. That Sahara was not doing well was evident in January too.

As far as infrastructure and landing rights are concerned, they are as valuable now, if not more, as Jet faces competition from new airlines and major airports have little space to expand. Pricing pressure and rising fuel costs are the main worries confronting Jet at present.

What has changed is the market capitalisation of aviation firms including Jet, which have fallen much more than the market. Jet’s share price itself is 40% lower than its January-levels when the deal was announced. Its FCCB issue to buy new aircraft will have to be postponed or alternative funding arrangements made.

Since Sahara would have been valued based on market conditions prevailing then, the buyout appears more expensive now. If regulatory approvals for the Sahara deal don’t come through, Jet stands to lose Rs 100 crore. Investors may believe it a small price to pay, given the current market conditions, both in the aviation industry and the stock markets.

Sure, Jet stands to gain on some fronts if Sahara were to slip from its hands. But if it were to go to a strong rival it would hurt the company too. A better alternative would be if the regulatory approvals come through, and the two airlines re-negotiate the price to reflect changed market conditions.