$1.17 Billion Deal Now Goes To Regulators
Here's the first airline merger announcement of 2008... and it
has nothing (well, very little) to do with
Delta. On Sunday, the board of beleaguered Italian flag carrier
Alitalia accepted a $1.17 billion takeover offer from Air
France/KLM.
The French takeover -- described as "hard to digest" in one
Italian editorial -- works out to one share in Air France/KLM for
every 160 shares in Alitalia... a valuation of .10 euro per share
in the Italian airline, or an 80 percent discount from Alitalia's
Friday closing stock price. And that's the best they could get for
the struggling airline, hit with labor strife and rising costs.
In exchange, Air France/KLM said it plans to inject one billion
much-needed euros into Alitalia's operations, reports The New York
Times, pending approval by the Italian government and Alitalia's
unions. If those groups sign off on the agreement, the merger will
go to EU regulators for their consideration by the end of June.
"Alitalia has given a painful yes to the French," wrote the
Italian business daily Il Sole-24 Ore wrote in an editorial
published Sunday. The news may be "hard to digest," writers added,
but admitted the French takeover was "the only concrete solution"
for the airline.
Nationalist pride aside, the Italian government is likely to
view the news with at least some rejoicing. With a 49.9 stake in
Alitalia, the government has injected 4.3 billion euros into the
struggling carrier over the past five years, trying to keep the
struggling airline in operation. That burden will now be Air
France/KLM's to bear.
Facing stiff competition from new domestic rivals like Air One,
Alitalia's share of the Italian travel market declined from over 80
percent 10 years ago, to around 30 percent today. The carrier loses
an estimated one million euros every day it's in operation, and is
about 1.3 billion euros in debt.
"I think that the government has acted to arrive at a positive
solution," said Italian labor minister Cesare Damiano, though the
government's final decision is pending a review of the deal's
impact on employees.
Analyst Dan Solon categorized the deal as "a pragmatic
solution," in the face of what's anticipated to be a very hard year
for many airlines worldwide.
"If you believe that 2008 is going to be a very bad year
economically, then obviously to the extent that they can get
through consolidation of the industry quickly, then Air France can
present this to the Italians as an alternative to going bust on
their own in this environment," said the Barcelona-based
analyst.
There is some question whether Italy's fractious government will
agree. Alitalia's CEO Maurizio Prato has said often a merger with
Air France/KLM was his airline's best option for long-term
survival. That view was echoed -- albeit reluctantly -- by Prime
Minister Romano Prodi, who signed off on merger plans in December,
as ANN reported, after an
auction for the carrier failed last summer.
Things have changed since then,
however. Prodi's government collapsed in January -- an event not
unfamiliar to the European country's history -- and new elections
are scheduled for next month. The leading candidate, former PM
Silvio Berlusconi, had insisted Alitalia not be sold to a foreign
entity... though he has softened his tone somewhat since.
If the deal is approved, Alitalia will keep its Italian
identity... but that may be one of the few things salvaged. Air
France/KLM plans to radically overhaul the airline's network,
basing the bulk of operations at Rome's Leonardo da Vinci Fiumicino
Airport, and scaling back operations from Alitalia's secondary hub
in Milan -- an airport frequently cited as one of the worst in
Europe by travelers. Labor leaders in Northern Italy aren't wild
about that plan.
Even if the deal is approved, there's also the question of
whether Air France/KLM might not soon live to regret the buyout...
as Alitalia may be too deep in the hole to salvage. Stay tuned.