It is ironic that Willie Walsh, head of the organization currently in talks to buy Aer Lingus, only two years ago said that Aer Lingus would be better off being owned by Ryanair than Abu Dhabi-based Etihad.
“Ryanair wants Ireland and, whatever you say about Michael O’Leary, he’s proud to be an Irishman, lives here and has created one of the most valuable airlines in the world.” Walsh went on to say in an interview with the Irish Independent.
In the past few days Aer Lingus Group Plc (AERL) has been more receptive to a possible buyout by IAG SA (IAG), the group that owns British Airways and Iberia. The deal would allow Aer Lingus to maintain its own brand and rejoin the Oneworld alliance that it left on March 31, 2007.
For British Airways, the deal would open additional departure and arrival slots at London Heathrow. The third busiest airport in the world by passenger traffic, Heathrow has been operating at near capacity for some time forcing carriers to resort to alliances or acquisitions in order to secure slots. In addition to Heathrow expansion, the deal would also grant access to less constrained trans-Atlantic routes from Ireland. Aer Lingus’ Dublin base has a well-established hub airport (DUB) with the added advantage of a US immigration pre-clearance facility.
British Airways controls more than half the slots at Heathrow, and if it were combined with Aer Lingus and Iberia, IAG would have 56 per cent of all flights coming into and going out of the airport. At 22 flights per day Aer Lingus is currently the fourth busiest airline at Heathrow, behind BA, Lufthansa and Virgin.
Aer Lingus’ board has been reportedly holding out for a more attractive deal which IAG has now proposed in the form of a buyout of €2.55 ($2.86) per share. Aer Lingus has stated that it has granted IAG access to conduct “a limited period of confirmatory due diligence.” The €2.55 per share proposal remains subject to the Irish government’s approval which owns over 25% of Aer Lingus stock. However, after two failed takeover attempts of their own, Irish Low Cost carrier Ryanair still owns 29% of the airline. Normally outspoken Ryanair CEO Michael O’Leary said in a statement last week that he was open to considering a bid for Ryanair’s stake.
Ryanair’s position on Aer Lingus
The Irish government had previously held an 85% stake in Aer Lingus until it decided to float the company on the Dublin and London Stock Exchanges on 2 October 2006. Notwithstanding O’Leary’s remarks, it is not clear whether Ryanair will not be a hindrance to the deal. Besides needing Ryanair’s board approval, the deal is also subject to the outcome of a UK Court of Appeal ruling into Ryanair’s stake. The airline had been told several times by the UK Competition Commission (UKCC) to slash its stake to no more than 5 percent, but Ryanair appealed to the UK Competition Appeal Tribunal (CAT) each time stating the following reasons:
- The UKCC did not have jurisdiction over its activities, as an Irish-based company, outside of the UK.
- The UKCC breached its duty of sincere co-operation with the EU authorities (which have yet to rule on a separate appeal lodged by Ryanair in May 2013 in relation to a takeover bid).
- The order to divest was a disproportionate remedy given Ryanair’s undertakings to offer “effective but less intrusive” remedies.
The CAT subsequently dismissed Ryanair’s appeal, which the airline then took to the UK Court of Appeal where the pending decision currently resides.
There is consensus among Ryanair, IAG and the Irish government that Aer Lingus cannot survive as an independent airline. O’Leary has said “we think the best and proper outcome would be for Aer Lingus to form a group with Ryanair and be a stronger Irish airline.” In fact O’Leary’s three futile attempts at buying Aer Lingus were not completely driven by his sense of duty as a good Irishman. Looking at the numbers, Ryanair stands to gain clear financial advantages from the acquisition.
Barclays Capital estimate that Ryanair could realize €25 million in cost savings during the first year of a merger; with subsequent years yielding additional savings. Taxed and capitalized these savings are estimated to be worth €175 million compared to the €134 million premium that Ryanair offered to pay for shares it doesn’t already own. Certainly IAG’s current offer of €1.3 billion would allow Ryanair to cash in its shares for an amount far in excess of €175 million, but it is still short of the €407 million that it spend buying the shares in the first place.
Regarding the pending outcome of the UK Court of Appeal. At a briefing at the Grosvenor Hotel in London last week O’Leary quipped that there would be some “delicious irony” if competition authorities allowed BA to takeover Aer Lingus after forcing Ryanair to sell its stake down. “Although I do think that if IAG makes an approach the option would be open to us to make a fourth approach” he continued.
However, just this morning (Jan 27, 2015) O’Leary claimed that it would be unlikely that Ryanair would be successful at another Aer Lingus takeover attempt. He also said that the IAG offer was subject to his board’s approval.
At the end of the day this deal may not face Ryanair opposition, but with the pending court appeal decision it could face some serious complications. If the court rules in favor of Ryanair this could embolden the carrier to make a fourth takeover attempt as O’Leary suggest. On the other hand, if it rules against Ryanair and the IAG deal is subsequently unchallenged by competition regulators, again we can expect to hear much more from Mr. O’Leary.