Aer Lingus Chairman Colm Barrington has written to shareholders to advise them that the Aer Lingus Board unanimously recommends rejection of Ryanair’s Offer of €1.30 per share, concluding: “The issues are simple and our recommendation is clear. The way to reject the Offer is to take no action.”
In a letter dated 31st July 2012, he says: “The Ryanair Offer is conditional on receiving merger approval from the European Commission. Your Board has received legal advice that the reasons for prohibition are even stronger now than they were when Ryanair’s first offer was prohibited by the European Commission in 2007. Your Board’s unanimous view is that Ryanair’s Offer to acquire control of Aer Lingus for €1.30 per share fundamentally undervalues Aer Lingus. Take no action and do not complete any Form of Acceptance.
“Ryanair’s first offer was prohibited in 2007 on competition grounds, and the reasons for prohibition are now even stronger than before. Your Board has received legal advice that the European Commission is likely once more to prohibit the Ryanair Offer as the number of routes into and out of Ireland that Ryanair would monopolise has sharply increased.
“In 2007, the European Commission prohibited Ryanair’s bid for Aer Lingus because of the dominance that Ryanair would obtain. Your Board has received legal advice that there is no reason to believe the European Commission would change its view given the increase in route overlap between Ryanair and Aer Lingus since 2007. Ryanair has not laid out for Aer Lingus shareholders details of the remedies that it claims would persuade the European Commission to give clearance, which only serves to increase the uncertainty around this Offer.
“(An accompanying) chart illustrates the increased overlap today as compared to 2007 on routes being served from Dublin, Cork, Shannon and Knock. This increase in overlap also highlights the dynamic competition between Aer Lingus and Ryanair in entering new routes and vigorously competing head-to-head. There were 35 routes that overlapped between Aer Lingus and Ryanair in 2007 and this number has increased to 50 routes in 2012. In 2007, Aer Lingus and Ryanair were the only operators on 22 of these overlapping routes and this number has doubled to 44 routes in 2012.
“In 2007 Ryanair was willing to give away many of the Aer Lingus slots at Heathrow Airport as part of a remedy package, and it may now offer this again. This could jeopardise both future competition and connectivity from Ireland via Heathrow, as some airlines interested in securing valuable Heathrow slots may commit to operate them on routes to Ireland for a limited period of time only, re-directing them when this time expires. It would, in any event, do nothing to protect competition on some 46 non-Heathrow routes out of Ireland.
“For the reasons outlined above, your Board believes that the competition issues are so serious that Ryanair’s Offer is not capable of completion and is, therefore, not a credible Offer.
“In addition, the UK Competition Commission is continuing to investigate the anti-competitive effects of Ryanair’s 29.82% stake in Aer Lingus, despite Ryanair’s repeated and ongoing attempts to stop both this investigation and the previous UK Office of Fair Trading investigation. The UK Competition Commission has confirmed that it is proceeding with its investigation and that it is doing so in co-operation with the European Commission. The UK Competition Commission has the power to order a sell-down of Ryanair’s shareholding and your Board has received legal advice that it is likely to require Ryanair to sell-down its current stake.
“Your Board remains strongly of the view that Ryanair’s minority shareholding is damaging to Aer Lingus and its other shareholders.
Our Strategy is Working – Aer Lingus is a Strong and Profitable Business
“Our strategy is working. We have re-engineered our business model, focussing on revenue management, imposing cost discipline and driving a recovery in profitability and performance.
“Since 2009, Aer Lingus’ new management team has delivered significant and successful change by repositioning our operating model to a demand-led value carrier with cost efficient network extensions through partnerships and code shares.
“Due to its relentless focus on cost, Aer Lingus is transforming into a leaner, more efficient business. Since 2009 Greenfield programme savings of €95.8 million have been delivered and we are on track to achieve our targeted cost savings.
“This has resulted in a significant improvement in operational and financial performance, driving a turnaround in operating result since 2009 of approximately €130 million.
“In 2011 … we delivered another year of strong profitability in a tough economic environment, resulting in an operating profit, before net exceptional items, of €49.1 million.
“Aer Lingus’ business is seasonal and typically loss making in the first half and profitable in the second half of the year, which reflects the peak travel period in the summer months. Today Aer Lingus released its results for the six months ended 30 June 2012 reporting an operating loss, before net exceptional items, of €4.4 million representing a significant improvement on the €26.8 million operating loss, before net exceptional items, for the comparable period in 2011. Revenues are up 10.1 per cent on 2011, with mainline passenger numbers up 3.4 per cent and average yields up 6.3 per cent, with long haul being particularly strong. Total revenues were €57.2 million higher than 2011, fuel costs were up €38.3 million with other costs overall in line with last year. Gross cash was €1,049.9 million and debt €572.2 million at 30 June 2012. If current trends continue, Aer Lingus’ operating profit, before net exceptional items, for 2012 will be at least that achieved in 2011 (€49.1 million).
“On 4 May 2012 Aer Lingus announced a change to its dividend policy and today paid a dividend of 3 cent per share, illustrating the Board and management team’s commitment to building shareholder value.
“Unlike the clear strategy that the Aer Lingus management team has set out and is delivering upon, Ryanair has not comprehensively disclosed its intentions regarding the future business and strategy of Aer Lingus.
“The Aer Lingus management team has proved that it can deliver in a difficult economic environment and the management team is committed to its strategy and to building the business in the future.
Ryanair’s Offer Fundamentally Undervalues Aer Lingus
“Aer Lingus is a robust and profitable airline with a proven business model, a strong balance sheet and an internationally recognised brand. Aer Lingus owns valuable assets, has over €1 billion of gross cash, is increasing its revenues and is engaged in ongoing cost saving initiatives, all of which are delivering enhanced and sustained profitability. Ryanair’s Offer to acquire control of the company for €1.30 per share fundamentally undervalues Aer Lingus and represents a significant discount to the intrinsic value of the business.
“Ryanair’s Offer of €1.30 per Aer Lingus share represents:
- A discount of 34 per cent to Aer Lingus’ gross cash per share of €1.96 (total €1,049.9 million) – the gross cash on Aer Lingus’ balance sheet more than pays for Ryanair’s Offer
- A discount of 12 per cent to Aer Lingus’ Net Asset Value per share of €1.48 based on the NAV shown in the 30 June 2012 balance sheet – this NAV does not attribute any value to either our attractive slot portfolio or brand
- A 2011 adjusted EV/EBITDAR multiple of 4.2x, a 30 per cent discount to the average trading multiple of Aer Lingus’ traded peers of 6.0x
“Ryanair’s Offer attributes no value to the valuable slots that the Group holds at London Heathrow, New York JFK and Dublin airports nor to the partnership and code sharing arrangements Aer Lingus enjoys with other airlines.”