Ryanair makes surprise bid for Aer Lingus

Travellers board a Ryanair passenger jet in a file photo. Picture / Reuters

DUBLIN - Ryanair, Europe's biggest budget airline, has launched a shock bid for Aer Lingus, valuing the former Irish state carrier -- which listed just four days ago -- at €1.48 billion ($2.90 billion).

Aer Lingus' board rejected the offer, saying it undervalued the group's business and long-term growth potential. Aer Lingus, which made a formal market debut in Dublin and London on Monday, priced its initial public offering last week at €2.20.

Ryanair's offer is at €2.80 a share -- a 27 per cent premium to that listing price.

"This offer represents a unique opportunity to form one strong airline group for Ireland and for European consumers," Ryanair Chief Executive Michael O'Leary said.

Under the deal, Ryanair -- which previously said it had no interest in the long-haul market -- and Aer Lingus, a short and long-haul carrier, would be run separately. Ryanair would stick to its highly successful low-cost, European carrier model.

However, analysts noted the deal would move Ryanair, with a market value of 6.7 billion euros and cash resources to fund the purchase of some €2 billion, from being a pure "no-frills" carrier investment to one with network carrier exposure.

Ryanair said it had bought 16 per cent of Aer Lingus in the market at an average price of €2.42 a share before making the offer. It raised its stake to 19.2 per cent on Thursday.

Aer Lingus' shares closed up 15.5 per cent at €2.90.

Ryanair shares fluctuated throughout the day. They dipped to €8.33 after the deal was announced, a fall of 4.3 per cent, before ticking up 3.4 per cent on the day to a life high of €9.00. They closed 0.8 per cent lower at €8.63.

The no-frills operator plans to retain Aer Lingus' staff and management and for Aer Lingus to maintain its current business model -- but Ryanair would help it to drive down costs.

In turn, Ryanair would benefit from Aer Lingus' superior earnings yield, which is better than the returns Ryanair can currently get on its cash deposits.

Aer Lingus' board unanimously rejected the offer.

"This approach is unsolicited, wholly opportunistic and significantly undervalues the group's businesses and attractive long term growth potential," chairman John Sharman said.

"In addition, the offer would raise significant regulatory issues as a result of Aer Lingus group's strong position in its core markets," he added in a statement.

However, O'Leary said he did not expect to face competition issues over the deal and that Ryanair and Aer Lingus' networks only overlapped on 17 of their combined 500 routes.

The government refused to sell its 28 per cent stake, saying it believed Ryanair was trying to create a monopoly.

"I and the government view this matter very seriously indeed," Transport Minister Martin Cullen told parliament.

"A monopoly is bad for business, bad for this country, bad for the customer, bad for the travelling public and it's bad for tourism interests in this country."

O'Leary -- targeting at least a 50.1 per cent controlling holding -- said he would be happy to have the government, with whom he has clashed in the past, as a minority shareholder.

Under takeover rules Ryanair can continue to buy in the open market -- at not more than the offer price -- until it reaches a stake of just under 30 per cent. A source familiar with the matter told Reuters that Ryanair would continue to buy when it could in the market.

Aer Lingus' employee trust, which holds some 10 per cent of the group, warned members they would face an effective 62 per cent tax rate, pre-transaction costs, on the sale of shares.

"This means that, contrary to the Ryanair announcement, the cash offer would amount to significantly less than €60,000 per employee," the Employee Share Ownership Trust said.

The company's main union, which opposed privatisation, was against the takeover. Ryanair does not negotiate with unions but said Aer Lingus would be able to operate as at present.

Analysts gave a mixed reaction to the proposals.

Exane BNP analyst Nick van den Brul said the deal could get competition approval though some routes may have to be shed.

"There would almost certainly be a competition investigation by the EU but it doesn't look insurmountable," he said, adding that investors would also want to be reassured the deal would not make Ryanair less profitable.

Deutsche Bank analyst Chris Reid noted: "Bulls of Ryanair will argue this deal gives the company option value and financially it may be possible to justify the deal.

"But we would say: if the growth in short-haul is so good, why is a highly rated pure play LCC (low-cost carrier) bothering to move into the long haul market where companies have half the rating," he added in a research note.

Ryanair's Chief Financial Officer Howard Millar said if the deal succeeded it would have a "small upward impact on margins".

The takeover would create an airline with about 50 million passengers annually, capable of competing with large European airline alliances and groupings like Air France-KLM and Lufthansa-SAS-Swiss.

Aer Lingus -- which had a valuation at listing of about 12.7 times earnings per share for calendar 2006, broadly in line with British Airways -- went to the market to raise money to help it with a planned 2-billion-euro fleet expansion.

O'Leary said he wanted Aer Lingus to continue that plan.

- REUTERS