MUMBAI/DUBAI Ambitious Gulf carrier Etihad Airways is taking almost a quarter stake in India's Jet Airways (JET.NS), giving it a bigger foothold in the fast-growing Indian market.
The $379 million investment is the first by an overseas operator in an Indian airline since ownership rules were relaxed and provides India's largest carrier with a deep-pocketed global partner as well as cash to retire debt.
Etihad, which has minority stakes four other carriers including Air Berlin (AB1.DE) and Virgin Australia(VAH.AX), has been expanding quickly as it competes with regional rivals Qatar Airways and Emirates EMIRA.UL, which carries a significant share of the Indian traffic to Gulf and beyond.
"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.
"It (the deal) is expected to bring immediate revenue growth and cost synergy opportunities, with our initial estimates of a contribution of several hundred million dollars for both airlines over the next five years," said James Hogan, Etihad's chief executive.
As part of the agreement Jet will establish a hub in Abu Dhabi and expand its reach through Etihad's global network while the airlines will also expand existing operations and introduce new routes between India and the Gulf.
The deal, finalized after months of negotiations, is a vindication for the Indian government which has struggled to attract overseas companies wary of regulatory uncertainty and bureaucratic red tape.
Etihad will buy 27.3 million new shares of Jet at 754.74 rupees per share, a 31.7 percent premium to Jet's closing share price on Tuesday, and acquire 24 percent of Jet's expanded share capital.
Etihad will also invest an additional $150 million in Jet's frequent flyer program and spend $70 million to buy Jet's three pairs of Heathrow slots through the sale and leaseback agreement announced in February.
Jet owner Naresh Goyal will hold 51 percent of the airline after the deal.
"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, partner at consultancy Athena Aviation.
The deal sets a valuation benchmark for further investment in Indian airlines, with budget carrier SpiceJet Ltd (SPJT.BO) frequently the subject of stake sale reports.
Jet shares have had a turbulent ride in recent months as talks with Etihad dragged on.
The stock is up about 70 percent since November, after media reports about a possible stake sale.
Despite high growth potential, India has been a tough aviation market in recent years, although competition has eased since former No.2 Kingfisher Airways (KING.NS) stopped flying late last year, dragged down by debt and cash-flow problems.
The premium paid by Etihad is sharply higher than the 5.5 percent premium Singapore Airlines Ltd (SIAL.SI) paid to lift its stake in Virgin Australia Holdings Ltd (VAH.AX) to 19.9 percent in another deal announced on Wednesday.
"This transaction further strengthens the balance sheet of Jet Airways and, more importantly, underpins future revenue streams, which will accelerate our return to sustainable profitability and liquidity," Goyal said.
Bank of America Merrill Lynch (BAC.N) and Credit Suisse CSGN.VX advised Jet on the deal, while HSBC (HSBA.L) was the adviser for Etihad, several sources said.
($1=54.3762 Indian rupees)
(Additional reporting by Henry Foy in MUMBAI and Stanley Carvalho in ABU DHABI; Editing by David Cowell)