Ryanair Holdings Plc (RYA) will struggle to overcome regulatory barriers to its renewed bid for Aer Lingus Group Plc (AERL), analysts said today as shares of the target carrier traded more than 10 percent below the offer price.
Europe’s biggest discount airline revived its pursuit with an offer of 1.30 euros a share, placing a value of 694 million euros ($883 million) on Aer Lingus, whose stock traded at 1.06 euros as of 12:29 p.m. in Dublin.
Ryanair already owns 29.8 percent of Aer Lingus, having been blocked from taking full control in 2007 when the European Commission ruled that it would dominate 35 routes and 80 percent of the market in Dublin, where both carriers are based. Irish Prime Minister Enda Kenny told lawmakers today that he has competition concerns about a possible takeover by the low-cost operator of the state’s former national carrier.
Ryanair (RYA) said in a statement yesterday that recent developments have changed the competitive landscape, with slots available for new entrants in the Irish capital and British Airways parent IAG recently allowed to purchase BMI, the second- biggest carrier at its London Heathrow airport base.
“The key issue is whether or not the EC permits this,” said Gerard Moore, an analyst at Merrion Capital in Dublin with a “buy” rating on Aer Lingus. “While a lot of Ryanair’s arguments make sense, we think the Commission will be concerned that there won’t be sufficient new entrants at Dublin airport to ensure effective competition, and therefore block the deal.”
Aer Lingus surged as much as 25 percent to 1.17 euros and pared gains after Kenny’s comments to trade 12.8 percent higher, still 24 cents shy of the offer price. That gives Aer Lingus a market value of 573 million euros. Ryanair was up 0.5 percent at 4 euros, valuing it at 5.76 billion euros.
Ryanair said the cash offer was also prompted by the Irish government’s plans to sell its 25 percent holding in Aer Lingus as part of wider disposal of assets aimed at balancing budgets.
“The government would be concerned obviously in terms of competition, in term of consumer facilities, in terms of price,” Kenny said. “We don’t have any veto over this, we don’t have any blocking rights and the details of the offer made by Ryanair have not yet been considered collectively by government.”
Aer Lingus will comment “in due course,” the company said in a release today, adding that in the meantime, “shareholders are urged to take no action.”
Ryanair’s bid, via a wholly-owned subsidiary, Coinside Ltd., would pay a premium of 38 percent over Aer Lingus’s closing price yesterday. Investors would also get a dividend of 3 cents a share announced by Aer Lingus on May 4 that they’re due to receive on July 31, it said.
“This offer represents a significant opportunity to combine Aer Lingus with Ryanair to form one strong Irish airline group,” Chief Executive Officer Michael O’Leary said in the statement.
He pledged to help lift Aer Lingus’s annual passenger total to 14 million over five years from 9.5 million today and said Ryanair would also invest in expanding trans-Atlantic flights.
Ryanair’s plan will “encounter familiar regulatory hurdles,” Edward Stanford, an analyst at Oriel Securities, said in an investor note. Gerald Khoo at Espirito Santo Investment Bank said prospects of a takeover succeeding “have improved, but not necessarily decisively so.”
The European Union regulator said in 2007 it couldn’t force Ryanair to sell its remaining Aer Lingus stake, while the company lost an appeal against the merger ban in 2010. A spokesman for the European Union in Brussels said today its decisions on Ryanair are well-known.
“The political climate is against Ryanair succeeding with its latest bid, but the acquisition of Aer Lingus is something it has wished to achieve for some years,” said John Strickland, director of JLS Consulting in London. “It probably senses that now is an opportune moment given the macro-economic climate and the quickening of the pace of consolidation.”
Matthew Hall, a lawyer at McGuire Woods LLP in Brussels, said a downturn in traffic in Dublin that has made more operating slots available is unlikely to change the EC’s view on the costs of competing with two established brands there, or on Ryanair’s record of “aggressive competition,” and might in fact be deemed to make new entry less likely.
Consolidation among carriers may also be deemed irrelevant since the regulator takes a route-by-route approach, he said.
Ryanair is also facing a full investigation by the U.K.’s Competition Commission of its holding in the smaller carrier after the national regulator said it may lead to higher prices. The Office of Fair Trading, Britain’s lesser antitrust watchdog, asked for the probe earlier this month.
The consolidation of Europe’s major carriers means that Aer Lingus’s future can best be secured within a larger Irish group, O’Leary said in the statement. Should a deal go ahead, Aer Lingus could continue to target a number of “primary” European airports to which Ryanair does not wish to operate, he added.
The purchase of Deutsche Lufthansa AG (LHA)’s BMI by BA owner International Consolidated Airlines Group SA (IAG) is highly relevant to Ryanair’s bid in that it united the top carriers at Heathrow, which has “little if any opportunity for new entrants,” he said.
With Etihad Airways having bought 2.99 percent of Aer Lingus last month, Ryanair’s offer will also open up competition for the government’s holding, maximizing receipts for the cash- strapped Irish state, O’Leary said, adding that Ryanair could alternatively work alongside another investor. Abu Dhabi-based Etihad said today it is monitoring Ryanair’s offer.
Morgan Stanley (MS) and Davy Corporate Finance are advising Ryanair and Coinside, according to yesterday’s statement, and the offer would be financed from Ryanair’s reserves.
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