Aer Lingus Takeover
International Consolidated Airlines (IAG LON) approach for Aer Lingus (AERL ID)
Transport Minister Paschal Donohoe has threatened to kill the Aer Lingus takeover "one way or the other" within weeks in a clear warning to IAG boss Willie Walsh that a deal must be struck soon.
The minister issued the ultimatum that the protracted takeover saga must be concluded successfully or rejected once and for all in an exclusive interview with the Sunday Independent.
"This is a matter I believe in the interests of everyone that should be wrapped up and concluded upon in the coming weeks," Mr Donohoe said.
When pressed for clarity as to how many weeks he had in mind, Mr Donohoe stressed: "I am talking in the coming weeks."
Senior Government sources last night said it could be closer to five weeks than three, but it is clear the process will not be allowed to drag on for months.
Mr Donohoe said it is up to IAG to deliver an improved offer quickly and that he is open to such an offer, but if this fails to materialise, then the process will be ended.
"The Government made very clear its decision," he added. "We would remain open for a further bid from IAG, if it was an improved bid. It is now important that if a further decision is to be made by me and by Cabinet, that one way or the other this matter is dealt within the coming weeks."
Mr Donohoe stressed: "It is important. I want to make clear, across the coming weeks, this matter is dealt with. We have evaluated this calmly. I do believe it is now in the interests of everyone that this phase of the process be dealt with."
The Sunday Independent was speaking to Mr Donohoe on Friday afternoon just after IAG boss Willie Walsh and Aer Lingus management met unions.
Speaking in Dublin, Mr Walsh indicated there was no major time pressure from his perspective to do a deal, but Mr Donohoe has clearly stated he is not prepared to allow the matter to drag on indefinitely. Mr Walsh also said he is unwilling to offer a longer guarantee for the use of landing slots into Heathrow Airport from Ireland than the five-year period already rejected by Mr Donohoe.
Despite earlier opposition to the takeover bid, there has been a significant shift in opinion within Government towards selling Aer Lingus in recent weeks. And Mr Donohoe said he remains very much open to an improved bid. Since the Government's decision to reject the third IAG bid for Aer Lingus, worth an estimated €1.4bn, Mr Donohoe's officials have met Mr Walsh's colleagues to see if progress is possible.
"But I want to reiterate, five years, as it stands, is not satisfactory for the Government," he said. "In the aftermath of that, we received further contact from IAG. Officials within my department had a meeting this week. We met them on Wednesday late afternoon, and in that meeting we reiterated our rationale behind our then decision."
Further meetings between the parties are due to take place later this week with Government sources likely to accept a guarantee on the Heathrow slots of between seven and eight years. Mr Donohoe rejected assertions that the previous offer was rejected because of the looming General Election, which sparked a wave of opposition from the Government backbenches.
"I never focused in on this being a bad deal because of the time of it. I simply focused on whether it was a good deal or not. I was very consistent in outlining how I would evaluate the bid and I stayed constant on that over the past number of months. In relation to the length of a guarantee, that is a matter for IAG regarding any commitment they make for any period longer than five years," he said.
But he stressed he remains open to an improved offer. "We are very clear in how we will analyse the bid. If IAG want to make further contact in terms of strengthened bid, we are open to that. We met them on Wednesday. I expect we will have a further meeting with them next week to make clear our views in relation to their last bid and any further bid."
Mr Donohoe said the decision of the board of Aer Lingus to support the bid is "an important input" in his decision making. But he warned: "I have to be focused on what is best for the country overall."
When asked to clarify what other barriers remain, Mr Donohoe said the offer must include specific guarantees of connectivity to all Irish airports and not just "between Ireland and the UK".
He added: "It is not enough to say you would maintain access between Ireland and the UK, because that could all be delivered through Dublin. The access that Cork and Shannon have must be maintained."
Sunday Independent
Follow @Indobusiness"We are a growing company... but every step further becomes more risky because we are the smallest competitor on the North Atlantic," Mr Mueller said.
Aer Lingus last week named company veteran Stephen Kavanagh would take over from Mr Mueller, who is leaving to attempt to turn around Malaysia Airlines.
IAG has allayed fears that it will use the take over to seize control of Aer Lingus' highly desired Heathrow landing slots by committing to keep the Irish airline's routes to Shannon and Cork and maintain Dublin as a European hub for passengers to New York.
Aer Lingus's board has already expressed its strong support for a deal but reiterated its enthusiasm for the deal.
"To enhance these excellent results and to accelerate Aer Lingus' growth, it is the board's strong belief that the company should now take the opportunity to combine with IAG", Colm Barrington, Aer Lingus chairman, said.
Mr Barrington added: "In this combination Aer Lingus will operate as a separate business while gaining access to IAG's extensive network and benefiting from its scale. These significantly positive benefits will de-risk Aer Lingus' future, strengthen its operations and enhance the future success of the company."
IAG still needs support from Aer Lingus' biggest shareholder, rival Irish airline Ryanair with 28.9pc of the company, and the Irish government, which owns a 25pc stake in the former flagship carrier.
Willie Walsh, IAG's chief executive and former Aer Lingus pilot, has led a charm offensive in recent weeks to convince Irish politicians of the merits of the deal. However, several members of Ireland's Labour Party have been expressed concerns about possible job cuts.
Paschal Donohoe, Ireland's transport minister, said that despite positive statements about "overall employment prospects..clarity is needed with particular refernece to the timeframe within which net aditional employment would be created".
Mr Donohoe also said that the government requires firm commitments on the future of its Irish to Gatwick services and longer commitments on maintaining Aer Lingus' Heathrow slots.
The government and its steering committee is still evaluating the €2.55-a-share price being offered by IAG and recommended by Aer Lingus, Mr. Donohoe said.
"The Government has acknowledged the strategic importance of aviation to Ireland as an island nation where over 80pc of passenger movements into and out of Ireland are by air", the transport minister said.
"Ireland's aviation policy has, for decades, favoured competition by seeking to have at least two major airlines with significant home bases competing in the Irish market. Aer Lingus plays a key role with almost 45pc of airline seats at Dublin, Cork and Shannon airports on Aer Lingus flights.
DUBLIN (Reuters) - The Aer Lingus (AERL.I) board reiterated its support for British Airways-owner IAG's (ICAG.L) takeover approach on Friday, aiming to counter sceptics in Ireland by saying it would enhance Ireland's position as a hub for European travel.
IAG's 1.36 billion euro (1 billion pound) offer already had the qualified backing of Aer Lingus's board with a formal recommendation subject to the agreement of its two largest shareholders: budget airline Ryanair (RYA.I) and the Irish state.
With the government yet to be convinced on the merits of selling its 25 percent holding, particularly ahead of tough elections next year, Aer Lingus chairman Colm Barrington gave a long list of reasons why they should back it.
"The board's view is that a combination of AerLingus with IAG has a compelling strategic rationale and will deliver significant benefits for Aer Lingus, its employees, its customers and for Ireland," Barrington said in a statement, Aer Lingus's first since recommending the raised offer on Jan 27.
The statement provided more detail than its original recommendation, explaining that Ireland would become a central hub for connections, that the deal would accelerate Aer Lingus's planned transatlantic growth and lead to new employment.
The firming up of support came a day after IAG boss Willie Walsh did a series of media interviews in Dublin and appeared at a parliamentary committee to assure politicians his intentions were "completely positive".
Dubliner Walsh, who started his career as an Aer Lingus pilot, warned sceptical parliamentarians that Aer Lingus would struggle to survive if they did not accept IAG's bid.
Aer Lingus's shares, trading 13 percent below the IAG offer price of 2.55 euros on worries over the political opposition, were 2.2 percent lower on the day at 2.2 euros by 1600.
(Reporting by Sarah Young and Padraic Halpin)
Makor Securities Merger Arbitrage and Special Situations Event-Driven and Merger Arbitrage Research Europe Event-Driven and Merger Arbitrage Sales Europe Alex Olvera [email protected] +44 207 290 5772 1 | P a g e 9 Feb 2015 Merger Arbitrage. Quick Report: IAG (IAG LN) approach for Aer Lingus (AERL ID) Update: Flat out rejection? Deal Terms Transaction terms Cash terms: €2.50 cash plus €0.05 dividend Current share price: €2.11 Target code: AERL ID Bidder code: IAG LN Spread Last Previous Value of the offer 2.55 2.2 Tgt Avg vol. $m 2.07 Spread Last Previous Gross 0.4 0.23 % 20% 8.4% Day to close 134 Net spread 0.4 Spread in % 20% Net Annualised 54% Expected Closing June 2015 Indicative Deal Calendar 18 Dec 14 Announced €2.30 9 Jan 15 Second approach €2.4 26 Jan New approach €2.55 24 Feb Aer Lingus expected results 27 Feb IAG expected results H1 2015 Expected completion Bloomberg reports that Ireland’s government is preparing to reject IAG’s indicative offer to buy Aer Lingus. We argued in our prior note (below) that politics were the issue, that the spread would not come in and therefore selling was a better choice A flat out rejection by the Irish Government would weigh heavily on Aer Lingus in our view. We see downside to €1.60 -€1.50 Deal overview and trading commentary This is an update to a prior note The issues that have helped Aer Lingus share price recently are the pension resolution and the so called NAV value which was below market cap. Analysts have looked at the value of the slots plus cash and decided Aer Lingus “value buffer”, that is slot value and cash vs market cap was huge. Surely a value play or not. The problem if the IAG deal is rejected can be Ryanair overhang and obstruction. But this time there is no takeover at the end of the tunnel. If the deal is rejected, first, the Articles of Association of Aer Lingus provide that any proposed disposal of Heathrow slots over which Aer Lingus has rights may be subject to a requirement for a resolution approved by shareholders voting at an extraordinary general meeting. Ryanair has such a large stake 29.9% that in theory they can block major restructurings and slot transfers. Slot “value” becomes illiquid. Second, Ryanair is appealing the appeal of the appeal or the appeal itself. I lost count. The problem is that when Ryanair is finally stopped from appealing, a divestiture trustee could be in charge of selling the stake and there is no consideration of “fair” price. The trustee divests, period. Such dynamics may still convince ministers not to prevent the merger but negotiate. If however, they do block the merger, Aer Lingus consensus fair value of €2 per share is unlikely to hold. The stock trades up to €0.35 away from consensus fair value in normal conditions. A larger discount would apply.
Makor Securities Merger Arbitrage and Special Situations 2 | P a g e Prior note 26 January 2015 Foreign carriers are not allowed to buy European airlines. If IAG is unsuccessful, who else would want to buy Aer Lingus? The downside is at least 40% from current share price while the upside is clouded by potential political intervention. At current share price €2.4, we are better sellers Ryanair owns sufficient stock to block major restructuring and disposals thus the reason they have been forced by the Commission to sell the stake. (Ryanair is appealing). In our view Ryanair is a happy seller at this offer level. Ryanair’s whole stake was acquired at a cost of €407.2m (according to submissions to the commission). The €2.55 cash offer would make Ryanair whole. If Ryanair does not accept, the risk is that eventually a divestiture trustee in charge of selling the stake (as per the Commission ruling) forces the disposal and bring less money to Ryanair. Further, the cash offer (while not as high as the €2.80 offered by Ryanair in 2006) is at a 25% premium to the value of Aer Lingus’ Heathrow slots plus cash after the IASS contribution. The problem could be politics. Ireland’s general election is next year. Already Fianna Fáil is calling the stake “strategic national interest” and wants a rejection of the deal. Unions may intervene as 1000 jobs could be lost says FF. Aer Lingus has been widely expected to merge. Without IAG, any stock bid premium could dissipate Aer Lingus 23 slots may be worth $535m to $710m based on recent slot transfers. Year Seller Approximate slot transfer price in $USDm 2014 Cyprus Airways 31.0 2013 Jet Airways 23.3 2013 Delta (buyer) 23.5 2007 Alitalia 15.2 2007 GB airways 13.6 Etihad “bought” three pairs of slots in February 2013 from Jet Airways of India for $70m, Delta paid $47m for two pairs of slots and Cyprus Airways sold one slot for $31 million to American Airlines Now, Aer Lingus has net cash of c€244m (€435m less €191m IASS agreed pension contribution) which means slots plus net cash are about €1bn vs the offer worth c€1.3bn thus the offer is at a 25% premium (where the stock had consistently traded at a discount to such metrics). The peak earning models analysts use to value Aer Lingus will also see upside from jet fuel price hedging. As at 30 September 2014, Aer Lingus had hedged 50% of its 2015 fuel requirement at an average price of US$937 per metric tonne. Aer Lingus reported that since September 2014, they have hedged an additional 40% of its 2015 requirement at an average price of US$701 per metric tonne. As a result, Aer Lingus has now hedged 90% of its estimated 2015 fuel requirement at an average price of US$830 per metric tonne. This compares to an average hedged fuel price of US$954 per metric tonne expected for 2014. The offer is also a premium to the average €2 consensus fair value before the bid was leaked.
Makor Securities Merger Arbitrage and Special Situations 3 | P a g e However, the issue we believe is politics. The Irish Ministry of Finance controls sufficient votes in Aer Lingus to block any Heathrow slot transfer and they also have specific guidelines as to the number of slots they consider “critical to ensure connectivity” with Ireland. IAG is likely to have to agree not to dispose of certain number of slots to comply with such guidelines. For this reason, the offer requires an irrevocable form the Ministry of Finance and Ryanair. Even if all these issues are agreed, the deal would require clearance from the EC and it would be scheduled to complete no earlier than H1 2015. Ireland’s election is due to take place no later than April 2016 but the parties would use the deal as a political football. This is another reason we believe the deal is unlikely to trade close to the terms even if/when firmed and therefore chasing the deal at current share price €2.40 (given the potential downside) seems premature in our view. Research Disclaimer This publication has been prepared by Makor Capital Limited (“Makor Capital”) and is intended for professional or qualified investors only. Makor Securities LLP (“Makor Securities”)is distributing this material to its clients who are Eligible Counterparties or Professional Clients under FSA Rules. It may also be disseminated to persons who are Investment Professionals within the meaning of the Financial Services and Markets Act 2000 (Financial Promotion) order 2005. In the United States Makor Capital only distributes this material to major US institutional investors (as that term is defined in Rule 15 a-6 of the Securities and Exchange Act of 1934) and to SEC registered broker-dealers or banks acting in a broker –dealer capacity” If you do not fall into any of these categories you should disregard it. This research material is a marketing communication. It is not investment research and has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It is not subject to any prohibition on dealing ahead of the dissemination of investment research. It has not been produced by Makor Securities. This material does not take into account the particular investment objectives, financial situation or needs of individual clients or other recipients. Before acting on this material, clients and other recipients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. This material should not be construed in any circumstances as an offer to sell or solicitation of any offer to buy any security or other financial instrument, nor shall it, or the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action. This material is produced by research providers which Makor Securities believes to be reliable, but Makor Securities does not warrant or represent (expressly or impliedly) that it is accurate, complete, not misleading or as to its fitness for the purpose intended and it should not be relied upon as such. Opinions expressed will be the current opinions of those producing the research as of the date appearing on this material only. We expect those producing the material in this report to update it on a timely basis but can give no undertaking that they will do so and regulatory compliance or other reasons may prevent them from doing so (or us from disseminating updated material). Members and employees of Makor Securities LLP, employees of Makor Capital, Makor Capital Markets and any firm producing this material (including Alternative Investment Management Research SA (“AIM&R”),) may from time to time have long or short positions in securities, warrants, futures, options, derivatives or other financial instruments referred to in this material. For Makor Securities, this information is set out in our Conflicts of Interest Policy which is available on request. Policies for the production of research from research providers (including AIM&R) are available on request.
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The Irish government is looking at a revised offer for airline Aer Lingus from British Airways owner IAG.
Ireland is considering the proposed deal in terms of its effects on competition, transport links, and jobs, its transport ministry said.
The Irish government has a 25.1% share in Aer Lingus, and must agree to any deal before it can go through.
Ryanair has a 29.8% stake in the airline, and also has a power of veto.
Irish transport minister Paschal Donohoe said the government would give the proposed deal "very careful examination" before taking a decision.
"There are important considerations to be taken into account in addition to price," he said.
The effects on competition in the market, transport links to Europe and the US, and jobs associated with those transport links must be taken into account before a decision is made, a spokesman for the department said.
Aer Lingus dealIrish airline Aer Lingus has said it is willing to accept a €1.36bn (£1bn) takeover offer from British Airways owner IAG.
But Aer Lingus said before it formally recommends the offer, IAG must "address the interests of relevant parties".
That is thought to mean its two biggest shareholders - the Irish government and Ryanair - and the unions.
The Irish cabinet held its weekly meeting on Tuesday, where the IAG offer was discussed.
In a statement, Aer Lingus said: "The board has indicated to IAG that the financial terms are at a level at which it would be willing to recommend [the offer] subject to being satisfied with the manner in which IAG proposes to address the interests of relevant parties".
Aer Lingus also stressed that IAG plans to operate Aer Lingus as a separate business, with its own brand, management and operations, should the takeover go ahead.
The trade union representing most Aer Lingus staff, Impact, has said that a takeover could lead to the loss of up to 1,200 jobs - a quarter of the workforce.
IAG's primary interest in the Irish carrier is its 23 pairs of take-off and landing slots at Heathrow airport - valued at about £30m apiece - allowing it to operate more flights.
Ireland's deputy prime minister warned at the weekend that protecting the country's air links with Europe and the US was vitally important in terms of inward investment, exports, business and tourism.
Joan Burton told RTE Radio: "What we will want to do as a government, and what's absolutely important, is to protect these slots and the connections of direct flights in and out of Ireland."
Previous bidsAer Lingus directly employs 3,900 people, mostly in Dublin, with 2,100 of these described as ground staff in areas such as clerical, operative and back office roles.
A takeover may also face competition concerns from European regulators. If IAG, which owns Spanish carrier Iberia, was forced to sell some Heathrow landing slots owned by Aer Lingus it could undermine the rationale for the deal.
Aer Lingus is the fourth-largest operator at Heathrow after BA, Lufthansa and Virgin Atlantic.
Analysis: Kamal Ahmed, BBC business editorHere's what I believe to be IAG's game plan.
On Aer Lingus, IAG has revealed that the airline will remain as a separate entity with its own brand and own management.
That will allay concerns within Aer Lingus that IAG would swallow up the airline as it did with the old British Midland carrier, bmi. That loss making airline, formerly owned by Lufthansa, became part of BA.
And given that Aer Lingus has already been through a significant restructuring and is making money, any efficiency drive (and IAG's chief executive, Willie Walsh, is famous for them) will be limited.
For Ryanair, Michael O'Leary, the chief executive, will want to ensure that he receives the best price possible for his 30% stake.
But given that he is likely to be a willing seller following competition concerns over the size of his holding, IAG will argue that €2.55 a share is not too shabby.
In a separate statement, IAG said that Aer Lingus had now allowed it access to its financial books to "perform a limited period of confirmatory due diligence".
Ahmed: IAG in Irish charm offensiveIAG's offer is worth €2.55 a share. Aer Lingus had rejected two previous IAG offers - pitched at €2.30 and €2.40 a share.
Aer Lingus shares were up 1.9% at €2.41 in afternoon trading on Tuesday, while IAG shares were also up 2.2% at 561p.
Ryanair built its stake in Aer Lingus as part of three failed attempts to buy the carrier. Competition regulators blocked the takeover bids and told Ryanair it must sell all but 5% of its shareholding. However, an immediate sale was delayed by a lengthy appeals process.
Robin Byde, a transport analyst at Cantor Fitzgerald stockbrokers, said IAG was seeking to build on Aer Lingus's lucrative niche on transatlantic routes, which offers customs and immigration clearance in Dublin and Shannon for flights to the US.
But he was wary about the politics of the deal and the potential for IAG to get "dragged into prolonged and distracting negotiations".
Makor Securities Merger Arbitrage and Special Situations Event-Driven and Merger Arbitrage Research Europe Event-Driven and Merger Arbitrage Sales Europe Alex Olvera [email protected] +44 207 290 5772 1 | P a g e 26 January 2015 Quick Report: IAG (IAG LN) approach for Aer Lingus (AERL ID) Irish election next year could derail the deal Deal Terms Transaction terms Cash terms: €2.50 cash plus €0.05 dividend Target code: AERL ID Bidder code: IAG LN Spread Last Previous Value of the offer 2.55 2.4 Tgt Avg vol. $m 2.07 Spread Last Previous Gross 0.2 0.23 % 6.6% 8.4% Day to close 148 Net spread Spread in % 6.6% Net Annualised Expected Closing June 2015 Indicative Deal Calendar 18 Dec 14 Announced €2.30 9 Jan 15 Second approach €2.4 26 Jan New approach €2.55 24 Feb Aer Lingus expected results 27 Feb IAG expected results H1 2015 Expected completion Aer Lingus without prior agreement from IAG tells today of their third approach from IAG. The potential offer said IAG is €2.50 in cash and a dividend of €0.05. Preconditions to include confirmatory due diligence, the recommendation of the Board of Aer Lingus and the receipt of irrevocable commitments from Ryanair and the Minister for Finance of Ireland to accept the offer. Deal overview and trading commentary At this level better sellers Problem is politics not Ryanair The upside is clouded by potential political intervention, which means deal is unlikely to trade tight. If the deal is confirmed at current terms, we assume the politics keep the deal trading on implied 75% probability of success, a t current share price, we are better sellers Ryanair owns sufficient stock to block major restructuring and disposals thus the reason they have been forced by the Commission to sell the stake. (Ryanair is appealing). In our view Ryanair is a happy seller at this offer level. Ryanair’s whole stake was acquired at a cost of €407.2m (according to submissions to the Commission). The €2.55 cash offer would make Ryanair whole. If Ryanair does not accept, the risk is that eventually a divestiture trustee in charge of selling the stake (as per the Commission ruling) forces the disposal and bring less money to Ryanair. Further, the cash offer (while not as high as the €2.80 offered by Ryanair in 2006) is at a 25% premium to the value of Aer Lingus’ Heathrow slots plus cash after the IASS contribution. The problem could be politics. Ireland’s general election is next year. Already Fianna Fáil is calling the stake “strategic national interest” and wants a rejection of the deal. Unions may intervene as 1000 jobs could be lost says FF. Aer Lingus has been widely expected to merge. Without IAG, any stock bid premium could dissipate.
Makor Securities Merger Arbitrage and Special Situations 2 | P a g e Aer Lingus 23 slots may be worth $535m to $710m based on recent slot transfers. Year Seller Approximate slot transfer price in $USDm 2014 Cyprus Airways 31.0 2013 Jet Airways 23.3 2013 Delta (buyer) 23.5 2007 Alitalia 15.2 2007 GB airways 13.6 Etihad “bought” three pairs of slots in February 2013 from Jet Airways of India for $70m, Delta paid $47m for two pairs of slots and Cyprus Airways sold one slot for $31 million to American Airlines Now, Aer Lingus has net cash of c€244m (€435m less €191m IASS agreed pension contribution) which means slots plus net cash are about €1bn vs t he offer worth c€1.3bn thus the offer is at a 25% premium (where the stock had consistently traded at a discount to such metrics). The peak earning models analysts use to value Aer Lingus will also s ee upside from jet fuel price hedging. As at 30 September 2014, Aer Lingus had hedged 50% of its 2015 fuel requirement at an average price of US$937 per metric tonne. Aer Lingus repor ted that since September 2014, they have hedged an additional 40% of its 2015 requirement at an ave rage price of US$701 per metric tonne. As a result, Aer Lingus has now hedged 90% of its estima ted 2015 fuel requirement at an average price of US$830 per metric tonne. This compares to an averag e hedged fuel price of US$954 per metric tonne expected for 2014. The offer is also a premium to the average €2 conse nsus fair value before the bid was leaked. However, the issue we believe is politics. The Irish Ministry of Finance controls sufficient v otes in Aer Lingus to block any Heathrow slot trans fer and they also have specific guidelines as to the nu mber of slots they consider “critical to ensure connectivity” with Ireland. IAG is likely to have t o agree not to dispose of certain number of slots t o comply with such guidelines. For this reason, the o ffer requires an irrevocable form the Ministry of Finance and Ryanair. Even if all these issues are agreed, the deal would require clearance from the EC and it would be scheduled to complete no earlier than H1 2015. Irel and’s election is due to take place no later than April 2016 but the parties would use the deal as a political football. Such political noise and union intervention is like ly to impact the spread even if the deal is firmed at current le vels. We show a probability table below to reflect that at current share price €2.39, the stock is already trading as if the deal is confirmed and given the potential downside a buy recommendation seems premature. Upside share price € 2.55 Break share price € 1.80
