India's Jet Airways will sell a minority stake to fast-growing Abu Dhabi-based Etihad Airways for roughly $379m after months of negotiations, giving a lift to India's embattled aviation industry.
The investment would be the first by an overseas operator in an existing Indian carrier since the country relaxed ownership rules in September to allow foreign carriers to buy up to 49 percent in local airlines, which face stiff competition and high operating costs.
It would give Etihad a bigger foothold in fast-growing India and provide Jet, the country's largest carrier, with a deep-pocketed global partner as well as cash to retire debt that totalled $2.1bn at the end of December.
Jet, controlled by London-based Indian entrepreneur Naresh Goyal, said in a brief statement to the stock exchange that its board approved the allotment to Etihad of 27.3 million shares at 754.74 rupees each on a preferential basis.
The price represents a 31.7 percent premium to Jet's closing share price on Tuesday. Indian markets were closed on Wednesday.
No other details were immediately available but several sources involved in the deal who declined to be identified said the shares would be newly issued, and would represent 24 percent of Jet's expanded share capital.
"It's a game-changing opportunity for Etihad, and a game-changing opportunity for India," Kapil Kaul, regional head of the Centre for Asia Pacific Aviation (CAPA), told Reuters.
Kaul said Jet would benefit from strategic expertise, cheap financing and possible fuel import benefits in addition to the capital injection.
The deal is also vindication of sorts for an Indian government that has struggled to attract investment from overseas companies wary of regulatory uncertainty and bureaucratic red tape.
"Over the last couple of years we have got into what I call self-inflicted challenges that Indian aviation brings to itself," Kaul said. "This gives an opportunity, a window for the world to look at India differently."
Several sources said Indian government involvement, including recent visits to the United Arab Emirates by Finance Minister P Chidambaram and others, helped assuage the worries of government-owned Etihad.
"Not just Chidambaram's visit, but there has been government-to-government talks at various levels. UAE wanted some assurances, which the Indian government has given them," a senior diplomatic source told Reuters.
The deal sets a valuation benchmark for further investment in Indian airlines, with budget carrier SpiceJet Ltd frequently the subject of stake sale reports.
Jet shares have had a turbulent ride in recent months as talks dragged over the a deal that drew intense media scrutiny in India. The stock is up about 70 percent since November, after media reports about a possible stake sale. The Indian carrier confirmed talks with Etihad in January.
In February, Etihad agreed to pay $70m for Jet's slots at London's Heathrow airport.
IndiGo, the biggest carrier by domestic market share, is eventually expected to launch an initial public offering.
Despite high growth potential, India has been a tough aviation market in recent years, although competition has eased since former No.2 Kingfisher Airways stopped flying late last year as it was dragged down by debt and cash-flow problems and has been unable to find an investor.
The nearly 32 percent premium is sharply higher than the 5.5 percent premium Singapore Airlines Ltd paid to lift its stake in Virgin Australia Holdings Ltd to 19.9 percent in another deal announced on Wednesday.
"The price is good for Jet. I think Etihad may have paid over the odds slightly, but with Kingfisher out of the picture there is only one full service heavyweight in town, and that's Jet," said Sudeep Ghai, managing partner at Athena Aviation, a consultancy in London.
Malaysia-based AirAsia Bhd, Asia's biggest budget carrier, plans to launch a domestic start-up airline in India later this year through a joint venture with the Tata conglomerate, India's biggest business house.
Etihad has negotiated stake purchases in four foreign airlines including Air Berlin, Virgin Australia, Aer Lingus and Air Seychelles.
The airline is expanding quickly as it looks to compete with regional rivals Qatar Airways and Emirates, which carries a significant share of Indian traffic to the Gulf region and beyond.
The deal is subject to regulatory and shareholder approval.
Officials from both airlines did not have immediate comment.
Bank of America Merrill Lynch and Credit Suisse advised Jet on the deal, while HSBC was the adviser for Etihad, several sources said.