Because you’re worth it…Posted: January 18, 2015
Willie Walsh’s IAG has offered to buy Aer Lingus for €2.40 a share – not much more than the €2.20 they floated at in 2006. But analysts say the numbers stack up for IAG and Aer Lingus shareholders.
Just over a week ago, former Aer Lingus boss Willie Walsh was busy dodging journalists who’d established a cordon around the doors to the vast auditorium at Dublin’s gleaming quayside Convention Centre.
Walsh, the chief executive of British Airways and Iberia owner International Airlines Group (IAG), was about to give a talk at the Pendulum Summit – a love-in to impart “wisdom from inspirational minds” to delegates.
But the hacks wanted to grill Walsh about IAG’s €1bn-plus takeover approach for Aer Lingus, made just before Christmas. Walsh had no intention to settling in for a chin-wag.
On stage, the Dubliner regaled the audience with quotes from famous Irish writers, including George Bernard Shaw’s nugget that all progress depends on the unreasonable man.
He also recalled how he’d recently spoken at an event in Glasgow, and later repaired to the well-known Horseshoe Bar in the city for a pint.
As he sipped on his drink, a local wag approached him.
“You’re Michael O’Leary,” he accused Walsh.
Walsh assured him he was wrong, but the man persisted.
“I’ve seen you on television. You’re Michael O’Leary.”
Again, Walsh pointed out his error.
“The accent and the pint of Guinness. It’s a dead giveaway. You’re Michael O’Leary,” the man insisted.
Fed up, Walsh turned to him: “Would you ever fu*k off, I’m not Michael O’Leary.”
“I knew you were Michael O’Leary!” came the satisfied reply.
Walsh had a couple of pops at the Ryanair boss, but acknowledged that O’Leary has been an aviation pioneer.
It also masked the ease with which Walsh and O’Leary can do business – arguably now more crucial than ever as IAG tries to buy Aer Lingus, of which Ryanair, for now at least, owns 29.8pc.
In 2012, when Ryanair launched its last effort to buy Aer Lingus, it did a deal with British Airways that would see the UK carrier gain control of the majority of Aer Lingus slots at Heathrow in an attempt to secure competition approval for a takeover.
The Ryanair bid was thwarted by Brussels, however.
Ryanair chief marketing officer Kenny Jacobs last week made it clear that Ryanair’s stake is up for sale.
Ryanair is battling the UK competition watchdog in court, having been ordered last year to sell all but 5pc of its Aer Lingus stake. Ryanair appealed and a ruling is imminent, but it’s almost certain that in the medium term it will be forced to offload the holding.
And with IAG offering €2.40 a share, valuing Aer Lingus at €1.3bn, it surely has to make sense to Ryanair to sell now. It can ask the UK’s Competition and Markets Authority for permission to sell its Aer Lingus stake to IAG, if a bid is formally recommended by the Aer Lingus board.
Selling would see Ryanair recoup the €407m it spent buying its Aer Lingus stake.
It also makes sense because IAG intends to focus Aer Lingus expansion on long-haul routes to the US from Dublin, rather than concentrating on expanding short-haul business to Europe – a segment that is increasingly hostile for Aer Lingus as Ryanair targets growth at primary airports and tries to attract more families and business travellers.
But Aer Lingus shareholders – especially retail shareholders rather than financial institutions – might well wonder why IAG has only put €2.40 per share on the table when the shares made their stockmarket debut way back in 2006 at €2.20. It’s hardly spectacular long-term appreciation.
But the market consensus is that Aer Lingus shareholders are lucky to be getting their money back, and that if they reject the IAG approach they will have to contend with a collapse in the Aer Lingus share price and no reasonable prospect of it returning to its current level for quite some time.
Outgoing chief executive Christoph Mueller radically overhauled Aer Lingus when he took over in 2009, edging it away from the cliff by slashing jobs and costs as the financial crisis took hold.
Yet how is it that Aer Lingus is now ‘only’ being valued at about €1.3bn by IAG?
After all, Aer Lingus is now being more profitable than it’s ever been (it will have made more than €61m in profits for 2014), had €572m of net cash at the end of last September, controls valuable take-off and landing slots at London Heathrow, and has sorted a long-running pensions dispute that removes a lot of industrial relations uncertainty from the equation.
But the cash balance will be cut by almost €200m – the price it’s paying to solve the pensions issue. At the end of 2013, it owned just six of its 47 aircraft, with the remainder on either finance or operating leases. All that, probably brings its net assets – including the off-balance sheet value of the Heathrow slots – to a ballpark €1bn.
“Aer Lingus is a small to medium-sized carrier sitting on the geographic periphery of Europe,” said RBC Capital Markets analyst Damian Brewer, who believes it’s IAG or no-one for Aer Lingus.
“Lufthansa is in no position, and neither is Air France-KLM, to be a potential buyer,” he added, pointing out that IAG is the only airline group for which Aer Lingus would be a genuine strategic fit.
IAG would also afford Aer Lingus longer-term advantages – for buying synergies, and not least for self-preservation on the part of Aer Lingus.
“Aer Lingus shareholders need to reflect very carefully on that,” said Brewer.
He pointed out that Aer Lingus’ Heathrow slots – whose value isn’t carried on the airline’s balance sheet – could conceivably be worth around €450m. Throw in its net cash, future prospects and other assets and he says that the “spreadsheet value” of Aer Lingus could arguably be €2.75 a share.
The reality is different though, he warns.
Aer Lingus is facing an intensified threat from Ryanair, and while the economic recovery at home has spurred the launch of new services to North America, that same recovery has ironically made Dublin a more attractive proposition for US competitors.
And all that – including the fact that Aer Lingus will need to start fleet renewal in a few years’ time – is being factored in to the amount of cash that IAG is willing to stump up.
Aer Lingus, said Brewer, is a “nice to have” for IAG, not a “have to have”.
David Holohan, the head of research at Merrion Capital, points out that the €2.40 IAG has offered values Aer Lingus at a lower metric than IAG itself is valued at, but takes into account the challenges facing the Irish airline and the fact that for no other airline does buying Aer Lingus make as much strategic sense.
He thinks that institutional investors will be keen to cash in.
“It’s IAG or nobody,” he said.