In today's newsletter we talk about the government's plan to sell stake in Air India and the fall of the legendary travel company Thomas Cook.


The Divestment operation

On Monday last week, Livemint reported that the government had set a rather ambitious target of selling stake in companies like Air India and Bharat Petroleum Corporation Limited by March 2020.

So what’s the deal here?

Well, for one, the government is quickly running out of avenues to boost income. It only recently cut corporate taxes and I am sure you’ve heard that GST collections have been a bit lacklustre as well.

So that leaves the government with very few alternatives. One of the more popular avenues for them to raise some money is by selling stuff they already own — like government-owned entities.

This obviously makes sense. The government has limited resources and these resources are best deployed in places that most need it. We are talking about health care, sanitation, public infrastructure etc. So what’s the point in locking up all this money in loss-making enterprises, especially when they serve little to no purpose.

In other words, you divest!!!

And with this thesis in tow, the government decided it was best to let go, at least parts of some companies that are not essential to the cause of the people.

The government has since made considerable progress on this front, albeit with a few hiccups.

For one, they’ve been quick to sell stake in companies that have actually been doing really well, like NTPC and Oil India. The logic here is simple. If it’s making a lot of money, everybody wants it. So it’s much easier to sell this stuff than a loss-making enterprise. The problem here is that it leaves all the bad apples for later. And when you get to the bad apples, things can take a pretty interesting turn.

Let’s consider Air India for example. The company is saddled with boatloads of debt. Prospective buyers don't want all this debt to be included in the deal. And it continues to bleed money. So how does one get Air India off the books?

It’s complicated.

In the past, the government has resorted to selling public sector companies by mixing them together in a nice little soup called the Bharat 22 ETF. Think of it as a unit that gives you access to multiple public sector companies at the same time. It’s a pretty neat way of getting rid of the not-so-good apples by mixing them with the good apples. And some investors won't mind paying for it so long as the government offers a discount. Yeah, that’s right. The government has been selling these ETFs by enticing people with a discount.

Anyway the question is — will Air India go down that route too?


For one you can only sell companies through the ETF route if they are already listed in the stock market. And even if Air India was a listed entity, the plan still wouldn't take off. Because once you add Air India to the mix, everything else looks pretty bad as well. That ETF will never sell. So the most likely option is to find a buyer, bargain hard and wash your hands clean.

Then there is the other problem — Trade Unions. Most loss-making public sector companies know full well that their losses are primarily driven by their inefficiencies. And when you have to turnaround a company, there will be layoffs, salary cuts and a whole lot of helpless wailing. So this move will see a lot of resistance from the employees. And if there are grave political compulsions the government might just relent.

Hopefully, this time around the government is tactile and is desperate enough to go through with the divestment. And hopefully it’s done with as little collateral damage as possible, so everyone can rest easy.


Thomas Cook Collapses

Also, in other news, Thomas Cook, the famous travel company is finally shutting doors after being in business for 178 years.

The Story

As more people started putting together their own travel plans, they had very little use for a travel agent i.e. Thomas Cook. In a desperate attempt to stay in business, the company kept borrowing more in the hope that the tide would turn.

Unfortunately, no such thing materialised and the company was left with too much debt, too little money and almost zero chance of scripting a turnaround. On Sunday, they finally called it a day and declared bankruptcy.

Note: Thomas Cook (India) is a separate entity and is not related to Thomas Cook, the UK company. They parted ways long back.

Alright, that' it for today then. We will see you on Tuesday!!!