02 December 2008

Aer Lingus rejects new Ryanair Take-Over Bid

The board of Aer Lingus has rejected a € 748 million offer by Ryanair to buy and take over their airline.
In a statement, the board strongly advised its shareholders to "take no action" in relation to the Ryanair offer.

An earlier take-over bid by Ryanair, issued more than two years ago, was also rejected and later blocked by the European Union as well.

On October 5th, 2006 - only days after Aer Lingus was floated on the stock market - Ryanair announced it had bought a 16% stake in Aer Lingus and was offering € 2.80 for each of the remaining shares.
After Aer Lingus rejected these advances, Ryanair declared a few hours later that it had raised its stake to 19.2%. The low-cost airline also said it had no problem with the Irish government keeping its 28.3% of shares.

It is no secret that Ryanair's CEO Michael O'Leary (right) has a dream. The maverick entrepreneur who changed the structure, character and costs of European air travel in a few years beyond recognition and forced many other airlines to adopt his concept at least in parts, wants to create a single powerful Irish airline, which could carry over 50 million passengers a year.

Ironically this is exactly the opposite of what he wanted - and did - when he established Ryanair, which was to break the monopoly of Aer Lingus. The new large airline he now envisages would in fact restore the monopoly situation Ryanair has broken.

After the rejection of the 2006 take-over bid, which was criticised by the Irish government and eventually banned on June 27th, 2007 by the EU Commission on competition grounds, some analysts believed that this was the end of it and Ryanair would be content with owning a significant portion of their rival's shares.

But they did not take into account the personality of Michael O'Leary. He is a man used to get what he wants. And when he has set his mind on something, he usually keeps at it like a terrier. Whenever there is a chance, he points out the "unique opportunity" to form a large, competitive and profitable Irish airline.

In a move that surprised most analysts and was announced to the Irish Stock Exchange in Dublin yesterday morning, Ryanair declared it was offering now € 1.40 per Aer Lingus share (exactly half of what they offered two years ago).

It already owns now 29.82% of the former state airline, having bought up more Aer Lingus shares steadily and quietly all the time.

Ryanair says it wants to "merge the two airlines into one strong Irish airline group under common ownership, similar to recent mergers in Europe such as Air France-KLM and Lufthansa-Swiss".
It points out that its proposal represents "a premium of about 28%" over the average closing price (€ 1.09) of an Aer Lingus share in November 2008.
In fact, it also represents an premium of about 25% over the closing price of € 1.12 of an Aer Lingus share on Friday.

Ryanair suggests that both airlines should operate as separate companies and keep their separate brands, but share and combine organisation and facilities (such as maintenance, catering etc.).

It says that if the offer is successful, it will double the size of the Aer Lingus short haul fleet from 33 to 66 aeroplanes over the next five years. And it also promises 1000 new jobs.

But still the board of Aer Lingus is having none of it. For them Michael O'Leary is what the Carthaginian General Hannibal was to the Senate of Rome: the arch enemy "ante portas" (at their gates).

Aer Lingus, previously a fully state-owned company, floated on the Dublin stock exchange only in 2006, after the Irish government had decided on a part-privatisation. Within days Ryanair began snapping up shares, before going public with its take-over interest.
Only outsiders and people who never heard of Michael O'Leary could have been surprised by that.

And O'Leary still keeps trying, now with new arguments. "The world has changed", he says, pointing out the various mergers of other airlines and dwelling gloomily on the recession and global financial crisis.

"Over the past two years, the trading environment for all European airlines has deteriorated dramatically as a result of high oil prices and the global recession," O'Leary states plainly. "And more than 30 airlines have failed this year alone."

He says that the airline has requested meetings with the Ministers for Finance and Transport (Brian Lenihan and Noel Dempsey), the board of Aer Lingus and the airline's ESOT trustees to discuss the latest move.

After the announcement Aer Lingus shares jumped over 16% to € 1.30 on the Dublin stock exchange, while Ryanair shares were down marginally.

As much as one might think that with the formal rejection from the Aer Lingus board this second attempt of Ryanair to swallow their rival has ended in failure, just like the first one more than two years ago, this is not necessarily so.
Michael O'Leary is a man with vision and long-term plans, and as long as there is even the slightest chance of success, he will not give up.

Take-over battles can be lengthy and costly, but Ryanair has deep pockets, filled with plenty of cash, which is becoming ever more scarce elsewhere. I am sure that O'Leary will continue to buy up as many Aer Lingus shares as he can get hold of. And the larger his stake in the company grows, the more likely it is that he might one day succeed with his take-over ambition.

With the Irish government finding itself in ever more financial trouble now, I would not rule out a deal in which Ryanair offers Finance Minister Brian Lenihan a nice lump sum for the 25.1% of Aer Lingus shares that are still in state ownership.
Michael O'Leary has long argued that it is "not the job of a goverment to run an airline". With an increase of the financial crisis and a decrease of government liquidity such an argument could suddenly find new supporters where there were none two years ago.

Only time will tell, but I would advise anyone - in government or private business - never to underestimate Michael O'Leary.

The Emerald Islander

P.S. In a separate development it has been reported that British Airways (BA) are in merger talks with Quantas, the main airline of Australia. If successful, this would create the world's third-largest airline.
In a statement BA says that a merger would be through the creation of a dual-listed company, listed in both London and Australia.
This follows indications from the Australian government that it may be prepared to relax the rules on foreign ownership. Under current Australian law, Qantas must be at least 51% Australian-owned and any individual foreign airline can only own up to 25% of it.

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