Aer Lingus Group Plc urged its shareholders to reject a 694 million-euro ($882 million) bid from Ryanair Holdings Plc, saying it can’t recommend an offer that’s likely to be blocked by antitrust regulators.
Even if Ryanair’s renewed approach, worth 1.30 euros a share, a premium of 38 percent on yesterday’s close, were to secure approval, it’s too low given recent financial performance figures, Dublin-based Aer Lingus said today in a statement.
Europe’s biggest discount carrier already owns 29.8 percent of Aer Lingus, having been prevented 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. Ireland’s government, which has a 25 percent stake, still has competition concerns about a possible takeover of the former national carrier, Prime Minister Enda Kenny told lawmakers today.
“There is significant uncertainty that any offer from Ryanair, if made, would be capable of completion,” Aer Lingus said. “The board, having considered the offer with its advisers, believes the offer, even if it is capable of completion, undervalues Aer Lingus.”
Aer Lingus closed 14.5 cents or 15 percent higher at 1.08 euros in Dublin, 22 cents or 17 percent shy of the offer price, giving a market value of 575 million euros. Ryanair rose 0.8 percent to 4.01 euros, valuing it at 5.77 billion euros.
Ryanair said in a statement after yesterday’s close 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.”
A price of 1.30 euros is, though, “just about right,” Moore said, taking into account Aer Lingus’s pension deficit of about 700 million euros.
Ryanair said the cash offer, which would be financed from its reserves, 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.”
Ryanair’s bid, via a wholly-owned subsidiary, Coinside Ltd., would include a dividend of 3 cents a share announced by Aer Lingus on May 4 that investors are due to receive July 31.
“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. Antoine Colombani, a spokesman for the Commission in Brussels, said today its decisions on Ryanair are well-known and that it will examine the deal if asked for regulatory approval.
“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’s BMI by BA owner International Consolidated Airlines Group SA 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 and Davy Corporate Finance are advising Ryanair and Coinside, according to yesterday’s statement. Cleary Gottlieb said today it’s providing legal representation.
Aer Lingus is being advised by Goodbody Stockbrokers, Rothschild and UBS AG, the airline said.