Global Economics

Indian Airline SpiceJet Gets WL Ross Investment


The U.S. investment firm invested just under $80 million to help the Indian budget carrier fund the expansion of its fleet

Specialist investment firm WL Ross will invest Rs3.45 billion ($79.8 million) in the latest round of capital raising by Indian budget airline SpiceJet. The investment gives WL Ross two seats on the board.

SpiceJet took to the air in mid-2005 as one of a new breed of low-cost carriers in India. In line with its low-cost positioning, SpiceJet flies only one type of aircraft, Boeing 737s, which allows it to control maintenance costs. It also focuses on profitable urban routes with high passenger volumes, enabling it to quickly turn around its planes and ensure maximum asset utilisation. A combination of these factors has ensured that SpiceJet has enjoyed the highest load factor, consistently above 70%, of all low-cost airlines. SpiceJet currently has a fleet of 15 planes in operation and its market share is estimated at around 10%. It has plans to add another 20 aircraft.

"We believe in the long-term viability of the low-cost airline model in India and the fuel prices eventually will stabilise," says Wilbur Ross Jr, chairman and CEO of WL Ross & Co, in a written statement.

WL Ross is a principal investment firm specialising in restructurings, buyouts, and industry consolidations. It was founded in 2000 by Wilbur Ross and is headquartered in New York. Ross himself, and Ranjeet Nabha, managing director and CEO of WL Ross India, will join the board of directors at SpiceJet.

This is the second investment by WL Ross in India. In February 2007, it acquired OCM India, a worsted suit-maker, for around $37 million.

SpiceJet has been raising new capital from financial investors at regular intervals to part finance its fleet expansion. In December 2005 it raised $80 million through an issue of foreign currency convertible bonds to Goldman Sachs and Istithmar. Istithmar had earlier that same year invested $12.5 million in SpiceJet equity. Then in January 2007, the airline operator issued another $71 million worth of equity to a consortium of investors including the Tata Group, BNP Paribas and Goldman Sachs.

Istithmar is a major investment house based in the UAE focusing on private equity, real estate, and alternative investments. Istithmar's investment in SpiceJet was its first investment in India.

SpiceJet did not clarify details of the latest issue in its Bombay Stock Exchange filing, but media is speculating that WL Ross will invest through a combination of a fresh share issue and a sell-down of convertible bonds held by Istithmar and Goldman Sachs. To comply with securities guidelines in India, WL Ross will have to buy less than 15% of the equity in SpiceJet or be forced to make an offer to minority shareholders for another 20% at the same price. NM Rothschild was the financial advisor to SpiceJet.

India's airline industry witnessed a wave of consolidation in 2007. The country's state-owned domestic carrier, Indian Airlines, merged with the national carrier, Air India. Private sector airline Jet Airways acquired Air Sahara, and liquor baron Vijay Mallya's UB Group acquired low-cost carrier Air Deccan, adding to his existing sector presence through Kingfisher Air. Analysts are generally positive that the wave of mergers and acquisitions will ease competition and allow dominant players to regain pricing power.

SpiceJet's shares are down from a high of Rs105 on January 8 this year as increasing aviation fuel prices have impacted airlines' financials and consequently sentiment for airline stocks. The stock closed 2% higher at Rs28.55 yesterday as investors welcomed the investment by WL Ross.

Anand is a writer at FinanceAsia.com.

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