Analysts believe Ryanair bid has merit

AUDACIOUS, stunning and breath-taking were just a few of the words used to describe Ryanair’s €1.4 billion hostile bid to buy a majority stake in Aer Lingus.

A day after Ryanair’s €2.80-a-share offer was launched in a blaze of publicity, the main players in the drama were working through the details of the takeover proposal.

Aer Lingus chief executive, Dermot Mannion has cut off his holiday in the United States to fly back to Dublin to lead the company’s defence. Assembled with the top management team were financial advisers Merrion Capital and Goldman Sachs and law firm Arthur Cox.

The company’s bid defence will be sent to shareholders alongside Ryanair’s offer document next week.

Typically in hostile situations the board would outline that the bid undervalues the company, that argument is hard to make given the €2.20 price the shares joined the stock market at just over a week ago.

Two other defences — buying back Aer Lingus shares on the market or paying a dividend — can be ruled out as the airline has earmarked the €504 million it raised from the stock market listing was to fund its expansion plans.

The focus is expected to be on Aer Lingus’ future growth plans for its long and short haul routes, arguing that its management is better placed to grow the airline than the low-frills Ryanair.

It will also warn shareholders that any bid by Ryanair will face scrutiny by competition watchdogs here and in Europe and jeopardise its “strong position in its core markets”.

If the two airlines were combined, they would have more than three-quarters of all flights from Ireland to Britain and would also dominate routes such as Brussels, Paris, Barcelona, Rome and Frankfurt.

The competition aspects of the deal will also be used by the Government as part of its plans to stop the takeover going ahead. Transport Minister Martin Cullen has firmly ruled out selling the State’s 28% stake in the airline.

Though the Competition Authority here may have some qualms about sanctioning a takeover that leads to the dominance of one airline in Ireland, getting the deal past Brussels should be less of a hurdle to cross. Combined, Ryanair and Aer Lingus carry just over 50 million passengers, far less than the other major European carriers like Lufthansa/SAS/Swiss, British Airways and Air France-KLM.

It is hard to believe that regulatory affairs head Jim Callaghan and A&L Goodbody solicitors have not gone over all possible competition scenarios before launching the bid, which has already cost it around €250m.

Ryanair will be looking to the institutional and small investors to back the deal on the grounds that a 27% premium to the IPO is the best return they will get.

With Aer Lingus shares above the €2.80 Ryanair is unable to enter the markets to add to its 19.21% stake. It will only be able to gauge the support for its bid when shareholders receive the offer document and return it with a pledge to accept or reject. It has, though, received some support for its bid from the financial community, notably analysts HSBC.

“In our view the transaction has strategic merit and is affordable, but it’s a potential distraction from Ryanair’s focus on delivering the lowest cost European air travel.”