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