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A management buyout isn’t a bad option for Jet

Sundeep Khanna

Recent media reports suggest a section of staffers at Jet Airways is exploring if there is an option for them to take over the stricken airline through a consortium comprising employees and external investors. The proposal is in a nascent phase and while the employees are confident of getting outside funding, with little support likely from investors and other financial backers, their effort may be in vain.

Yet management buyouts (MBOs), the process they have proposed for the takeover, may well be an idea whose time has come in India. Worldwide, powered by equity and debt funds, such deals have been growing particularly in the IT industry. In India though, they have been few and far between.

The Jet executives who are fronting the move represent various functions at the airline. In a letter to the chairman of its principal lender State Bank of India, they have referred to the buyout at United Airlines, where in 1994, employees finally sealed a long-running effort to take control of the distressed company, accepting deep cuts in salaries and benefits in return for a majority stake. That MBO was driven by the pilot’s union, though eventually it involved more than 54,000 of the airline’s workforce of 75,000. The story did not have a happy ending though. In 2002, UAL Corporation filed for bankruptcy protection and the employee stock option plan was terminated, though by then the shares had lost all their value.

So does an MBO make sense at Jet in the present circumstances?

It would be fair to say that with the exit of Naresh Goyal, the employees do have the maximum skin in the game. Confronted with unpaid salaries and an uncertain future, the senior executives offer the best chance of getting the grounded airline back in the air. That alone should give them an edge over the other stakeholders.

In hindsight now, it is clear that Jet’s promoter Naresh Goyal ran the airline like a family firm, with his wife and son involved in key decision-making. We know where that went. Indeed, barring a handful of them, all that most Indian promoters bring to their business is the barest of equity.

As for the lenders, they have proved to be utterly inept in making the right judgement calls at appropriate stages of Jet’s growth. Once again that’s a familiar pattern. Banks and other financial institutions seem to have no clue about the goings-on at the companies they have lent to. With borrower after borrower having made a soft call to lend either under political pressure or because of poor understanding, lenders have continued to throw good money after bad, halting only when the business itself comes to a standstill. This is as true of the much reviled public sector banks as it is of private banks as the recent disclosures in Yes Bank have shown.

Shareholders for their part are too narrowly focused on the stock price to really bother about the long-term health of the company they are invested in. Indeed, even as Jet’s performance was in free fall, its share price kept making surprising gains. There is a reason why in the UK shareholders are not considered part owners of the company in the eyes of the law.

Against this backdrop, there is clearly a case for the current management to be given a shot at the airline’s future. While rare, there are examples of successful MBOs in India. V. Vaidyanathan’s MBO at a small non-banking financial company (NBFC) in 2012 was funded by Private Equity Firm Warburg Pincus and led to his setting up of Capital First. Earlier, in 2007 the management team of Intelenet Global Services (Intelenet) backed by a subsidiary of private equity firm The Blackstone Group, acquired the BPO services provider. Last year, Blackstone sold Intelenet to the French firm Teleperformance for one billion dollars.

Globally, Michael Dell’s 2013 buyout, with backing from private equity firm Silver Lake, of all publicly held stock of Dell Inc., the company he had set up in 1984, is considered a lifesaver for the tech giant, which had fallen on bad times.

The heyday of MBOs came in the 1980s when the appearance of high-yield junk bonds fuelled hundreds of such transactions in the US. The most infamous of these was the attempted but eventually abortive buyout of RJR Nabisco by its chief executive officer F. Ross Johnson, without the knowledge of its board.

Since then, MBOs have gained much respectability and as businesses become more complex and domain expertise a more relevant ownership requirement, they are becoming a worthwhile option for owners looking to exit as well as shareholders looking for alternate owners.

Executives who are keen to a do an MBO usually look to do so when the company’s stock price is low. Jet’s price at 149 is at a historical low. If they do follow up on their proposal and manage to find the money, the MBO could take the company from being publicly-traded to being privately held, which may work well in a revival phase. But crucially, for it to go anywhere the MBO team will need to have a strategy that is different from the one deployed by the Goyals with a particularly superior financial model.

Sundeep Khanna is an executive editor at Mint and oversees the newsroom’s corporate coverage

via LiveMint

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A management buyout isn’t a bad option for Jet


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