Offer hampered by complex regulatory issues, warn analysts

A lot of fingers in one pie, is how analysts are describing the complex issues surrounding the attempted purchase of Aer Lingus by Ryanair.

Aer Lingus is urging shareholders to reject the bid. It said the work done in turning the airline around is not being reflected in Ryanair’s offer which undervalues the company.

“The board, having considered the offer with its advisers, believes the offer, even if it is capable of completion, undervalues Aer Lingus. Aer Lingus shareholders are accordingly advised to take no action in relation to the offer,” a spokesperson for Aer Lingus said.

NCB stockbrokers’ analyst, Alan Duff, said that the volume of trading in Aer Lingus shares yesterday was actually quite low, indicating that the market did not think that Ryanair chief executive Michael O’Leary’s bid for Aer Lingus was credible.

“The volume of trading of Aer Lingus shares has been quite low — that’s telling you hedge funds have stayed away. Why have they stayed away? The issues with the EU.”

The European Commission blocked two previous bids by Ryanair to buy Ireland’s flag carrier. Merrion Stockbrokers’ Gerard Moore agreed with the analysis that the key issue in all of this is whether the commission will allow the takeover bid to go ahead.

Mr Moore pointed out that the previous bid was rejected in 2007 on the grounds that the airlines competed on 35 routes and a merger would lead to a monopoly on 22 of these routes. In an attempt to placate the commission, Ryanair said it is prepared to offer slots to entrants at Dublin Airport, but the commission has in the past considered the gesture insufficient.

“We would be surprised if the EC [European Commission] reversed its previous decision. That saying, Ryanair states that it can address the EC’s concerns prior to completion of this offer. If it can convince the EC there will be meaningful competition out of Dublin, its offer would have greater chance of success,” said Mr Moore.

Antoine Colombani, a spokesperson for the competition department in the commission, said they had not been officially notified of the bid. “I’m sure Ryanair will want to get in touch with us. Previous decisions by the commission in relation to Ryanair and Aer Lingus are well known, but we will re-examine any new notification from scratch.”

Any investigation would be based on market context only and would not take into account the bailout deal condition that the State sell off various assets, including its stake in Aer Lingus, he added.

It is understood that Ryanair has had unofficial contact with the commission to tease out potential issues and ensure that their proposal covers the criteria for such mergers.

Mr Duff said that the contrarian point of view is that Mr O’Leary is trying to force other possible bidders such as Etihad, who bought 3% of Aer Lingus and are reportedly interested in acquiring the Government’s 25% stake in the airline, to show their hand.

“The other side of the coin is that Micheal O’Leary is doing this to force other bidders to show the colour of their money,” he said.

Dolmen stockbroker analyst, Ian Hunter recommended that shareholders take a profit on the speculation because EU open skies laws preclude Etihad from owning any more than 49% of Aer Lingus.

“Speculation on counter offers is bound to buoy the stock over the coming days. However, EU foreign ownership rules do not allow non-EU airlines to own over 49% of an EU-based airline, which would preclude the presumed main counter bidder, Etihad,” he said.

The offer did drive up the Aer Lingus share price yesterday. It closed 15% higher at €1.08 in Dublin, or 17% short of the offer price, giving a market value of €575m. Ryanair shares rose 0.8% to €4.01, valuing it at €5.77bn.