Would You Buy That?

At first glance, the owners of a major company looking for buyers is nothing special. Most people thing of acquisitions as starting from the buyer’s side – somebody finds a company that they think can create synergy with their existing assets and puts in an offer to buy it – but it isn’t at all unusual for an ownership group to decide that one or more business units are not going to become profitable in the future and look to sell them off. It is somewhat more uncommon for such an offering not to get a single bid, even one that dramatically lowballs the value of the company being offered and is extended just to see if the seller is serious. What makes the story from earlier this week so remarkable is that the seller in question is a national government – and the company being offered for sale is their national carrier…

If you missed it, the Times of India article is available here. Why exactly the offer hasn’t drawn any bids isn’t entirely clear – it can be very difficult to explain things that didn’t happen – but a few parts of the deal seem a bit unworkable. Assuming the debt owed by the company being acquired isn’t unusual in this sort of transaction, but when there’s a lot of it (as in this case) it can serious impede efforts to recoup the cost of the purchase. Taking responsibility for an inappropriately large work force can also be problematic, given the costs in both severance pay and public relations that will be involved in cutting down the number of employees to a manageable level. But what really sounds like the deal-breaker to me is that the Indian government is only looking to unload 76% ownership of the company…

Now, let me stress that I don’t have anything against public-private partnership arrangements in general. In this case, however, the national elections in India are apparently less than a year off, and there is no guarantee that the government will continue to cooperate with an acquiring company if the party currently in power does not retain control following the election. In fact, if I’m reading this article correctly, there’s no telling what a new government might choose to do regarding the sale. There is always some degree of uncertainty in an acquisition project, but it’s hard to blame any potential buyer from being skittish about having to work with a minority partner whose identity, let alone policy, could change at any moment…

Why, exactly, the government wants to retain a 24% interest in the airline isn’t clear in the story, although I’d expect it has something to do with this having been the national carrier up until now. Also unclear in this reporting is the question of why the government believes that Air India would have been an attractive takeover target in the first place. The industry isn’t quite as volatile outside of the US, where only one major airline (Southwest) has consistently made money over the last 30 years, but neither jet fuel, landing rights, or airliners are getting any cheaper, while the world of international travel is becoming increasingly dangerous. And the fact that all of the relevant unions have been opposing the sale definitely doesn’t this offering any more attractive…

Operating an airline that hasn’t made a profit in years would be difficult enough without adding a significant debt load and an unpredictable minority partner to the mix, let alone all of the other issues that appear to be in effect. Unless the government can identify some other selling point for Air India, it seems likely that they’re going to be stuck running the airline as a public entity for some time to come. Maybe things will improve after the elections, or perhaps they can bring some intangible factors (National pride? Love of air travel?) into the mix. But unless they can find some way to make the acquisition more attractive, they may eventually just have to shut down the company, sell off the remaining assets, and hope that the hit to national pride won’t be any worse than having to deal with the fact that no one seems to consider their national carrier worth buying in the first place…