Ryanair, Europe’s biggest budget airline, launched a shock bid for Aer Lingus on Thursday, valuing the former Irish state carrier — which listed just four days ago — at $1.9 billion (1.48 billion euros).
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 euros.
Ryanair’s offer is at 2.80 euros a share — a 27 percent 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 euros, from being a pure “no-frills” carrier investment to one with network carrier exposure.
Ryanair said it had already bought 16 percent of Aer Lingus in the market.
The no-frills operator plans to retain Aer Lingus’s 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’s 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’s networks only overlapped on 17 of their combined 500 routes.
Aer Lingus’ employee trust, which holds around 15 percent of the group, was not available to comment.
The government refused to sell its 28 percent stake but O’Leary — who is targeting at least a 50.1 percent 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 percent. A source told Reuters Ryanair would continue to buy when it could in the market.
The airline’s main union, which opposed privatization, said the takeover would be bad for Ireland. Ryanair does not negotiate with unions in its own business 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 investors would also want to be reassured the deal would not make Ryanair less profitable.
Deutsche Bank analyst Chris Reid said: “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 would want Aer Lingus to continue with the upgrade of its long-haul network.