Eti­had flies in to res­cue Jet, will help raise $150 mn debt

Hindustan Times (Ranchi) - - World - Reuters feed­[email protected] ■ De­bor­shi Chaki de­bor­[email protected]

MUMBA/BENGALURU: HCL Tech­nolo­gies Ltd will buy some soft­ware as­sets from US-based IBM Corp. for $1.8 bil­lion, the com­pa­nies said on Fri­day, mark­ing the largest pur­chase ever by an In­dian IT ser­vices firm.

HCL Tech will buy seven soft­ware plat­forms from IBM, giv­ing it a larger clien­tele and al­low­ing it to step up its pres­ence in ar­eas such as com­merce, se­cu­rity, and mar­ket­ing — an over $50 bil­lion mar­ket op­por­tu­nity that the In­dian firm said would help boost prof­its.

The deal will also help HCL col­lect ad­di­tional revenue of about $650 mil­lion in the sec­ond year of the ac­qui­si­tion on a run­rate ba­sis, though sales would take a roughly $25 mil­lion hit in the first year.

Shares in HCL, which lags big­ger lo­cal ri­vals Tata Con­sul­tancy Ser­vices (TCS) and In­fosys in big data, an­a­lyt­ics and cloud com­put­ing, tum­bled as much as 7.7% on Fri­day to their low­est since July 6 af­ter the deal was an­nounced.

The fall knocked some $1.5 bil­lion off the mar­ket value of the com­pany chaired by In­dia’s sixth-rich­est per­son Shiv Nadar.

HCL will bor­row $300 mil­lion to fund the deal, while the re­main­der will come through its prof­its. The trans­ac­tion is ex­pected to close by mid-2019, ac­cord­ing to a state­ment.

Some IT an­a­lysts said the deal did not make strate­gic sense for HCL over the long term be­cause it al­ready main­tained a part­ner­ship with IBM for a bulk of the prod­ucts it was buy­ing and was over­pay­ing for the pur­chase.

The prod­ucts be­ing ac­quired were in the mid­dle or end of their life cy­cles and would likely not show more than a mid-sin­gle digit per­cent­age growth, In­dian bro­ker­age Axis Cap­i­tal said in a note.

“This deal is a neg­a­tive from HCL’s stand­point,” said Sud­heer Gun­tu­palli, an an­a­lyst with Am­bit Cap­i­tal in Mumbai, adding that HCL would have to keep in­vest­ing in these prod­ucts to en­sure they don’t be­come ob­so­lete.

HCL recorded revenue of ₹50,569 crore ($7.16 bil­lion) in the last fis­cal year. TCS, the largest listed com­pany in In­dia, made ₹1.23 lakh crore in revenue, while In­fosys raked in ₹70,522 crore.

The com­pany plans to fund the deal—which is ex­pected to close by mid-2019—through in­ter­nal ac­cru­als and debt of $300 mil­lion at close and pay most of the ac­qui­si­tion price af­ter the first year.

For IBM, the deal is an op­por­tu­nity to fur­ther trim its legacy busi­nesses as it fo­cuses on cloud com­put­ing. The US com­pany has been hurt by slow­ing soft­ware sales and wa­ver­ing de­mand for main­frame servers, mak­ing a turn­around dif­fi­cult.

The prod­ucts it is sell­ing in­clude its se­cure-de­vice man­age­ment prod­uct Big­Fix, mar­ket­ing au­to­ma­tion soft­ware Unica and work­stream col­lab­o­ra­tion prod­uct Con­nec­tions. MUMBAI: In an ap­par­ent res­cue act, Eti­had Air­ways of Abu Dhabi has of­fered to guar­an­tee loans worth $150 mil­lion that Jet Air­ways (In­dia) Ltd needs to keep the air­line op­er­a­tional, two peo­ple di­rectly aware of dis­cus­sions be­tween the two air­lines said.

The de­vel­op­ment fol­lows sev­eral rounds of talks be­tween the two sides which also in­cluded a po­ten­tial eq­uity in­fu­sion by Eti­had and adding a third In­dian partner, said the two peo­ple cited above. Both re­quested anonymity as the talks are pri­vate.

“As an im­me­di­ate mea­sure, Eti­had has agreed to stand as a guar­an­tor for any fresh loans to be raised by Jet Air­ways and has en­gaged at least two for­eign banks, one of them head­quar­tered in UK to syn­di­cate the new loans,” said the first per­son.

“Both sides feel that an eq­uity in­fu­sion by Eti­had which al­ready owns 24% in Jet Air­ways will take time and it may not be enough for Jet Air­ways to tide over its cur­rent fi­nan­cial trou­bles, given Jet’s de­pressed val­u­a­tions,” the per­son said.

“In the given sit­u­a­tion, both sides which have been dis­cus­sions for a while now, feel that this is the best pos­si­ble so­lu­tion for now.

Ac­cord­ing to in­dus­try es­ti­mates, Jet Air­ways will need close to $500 mil­lion be­tween now and April next year to meet re­pay­ment obli­ga­tions and man­age op­er­at­ing ex­penses.

A spokesper­son for Eti­had Air­ways said it does not com­ment on ru­mour or spec­u­la­tion. An email sent to Jet Air­ways re­mained unan­swered un­til press time on Thurs­day.

Jet Air­ways is al­ready be­hind sched­ule on pay­ment of its air-

HCL WILL BOR­ROW $300 MN TO FUND THE DEAL, WHILE THE REST WILL COME FROM ITS PROF­ITS. DEAL IS LIKELY TO CLOSE BY MID-2019

JET WILL NEED CLOSE TO $500 MN BE­TWEEN NOW AND APRIL 2019 TO MEET RE­PAY­MENT OBLI­GA­TIONS, OP­ER­AT­ING EX­PENSES

craft lease rentals and has not paid staff salaries in full for the past few months. Since Jan­uary, shares of Jet Air­ways have plunged more than 66% to ₹278.20.

In Oc­to­ber, rat­ing agency ICRA down­graded its long-term rat­ing for the air­line’s bor­row­ing pro­gramme (CHK) to ‘B’, which is as­signed to loan fa­cil­i­ties with high risk of de­fault. The wors­en­ing credit pro­file has made it vir­tu­ally im­pos­si­ble for Jet Air­ways to raise fresh loans.

“Eti­had’s of­fer comes with a rider,” said the sec­ond per­son cited above.

“It also wants Jet’s do­mes­tic lenders to si­mul­ta­ne­ously in­crease lim­its for Jet’s loans.” Some of Jet Air­ways’ big­gest lenders, mainly pub­lic sec­tor banks, have been sounded off by Eti­had and Jet,” the per­son said adding “the do­mes­tic lenders are yet to come back with a firm com­mit­ment.”

Mint re­ported in Au­gust that Jet Air­ways has writ­ten to a con­sor­tium of over­seas lenders, seek­ing a waiver of a loan covenant on its ex­ist­ing debt fa­cil­ity of about $185 mil­lion in a bid to avoid a de­fault on its loans.

Mint also re­ported on De­cem­ber 5 that Jet Air­ways has told its pi­lots at a meet­ing last week that it will bring on board a new in­vestor in two-three months. Jet Air­ways of­fi­cials, led by chief ex­ec­u­tive Vi­nay Dube, gave the as­sur­ance at a Novem­ber 26 meet­ing with the pi­lots’ union, Na­tional Avi­a­tor’s Guild.

The meet­ing was held to as­suage pi­lots about var­i­ous is­sues in­clud­ing salary delays, Mint had re­ported.

AFP/GETTY IM­AGES

■ Jet Air­ways is al­ready be­hind sched­ule on pay­ment of its air­craft lease rentals and has not paid staff salaries in full for the past few months.

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