and here is an interesting analysis by the Sunday Business Post on the takeover battle.
Aer Lingus game is far from over
Sunday, November 26, 2006 By David Clerkin
Horse-racing fans know the difficulty of picking a winner from a crowded field.
But as the smoke cleared after Ryanair’s swoop on Aer Lingus appeared doomed to failure last week, the task of identifying which of the drama’s main players came out ahead looked even more challenging.
Aer Lingus chief executive Dermot Mannion can be satisfied that he successfully battled to keep the airline out of Ryanair hands. The Aer Lingus Employee Share Ownership Trust (Esot) reinforced its position as protector of staff interests with a comprehensive rejection of the takeover.
The fringe players - the airline pilots’ pension fund, the pilots’ investment group and telecoms billionaire Denis O’Brien - are left to count substantial investment losses after seeing the Aer Lingus share price fall well below the levels at which they bought heavily. They can at least console themselves, however, that their building of a combined stake of 6 per cent achieved the strategic objective of blocking the Ryanair move for the time being.
But Ryanair chief executive Michael O’Leary, who wreaked havoc on Aer Lingus management by taking a significant 19 per cent share in the airline but ultimately fell short in his quest for overall control, is unlikely to be too disappointed with his position.
The extent of last week’s Esot landslide, which saw a 97 per cent vote against Ryanair’s approach, made O’Leary’s strategy, which included attempts to court Aer Lingus employees, seem even more curious than it had first appeared.
O’Leary had raised eyebrows in recent weeks by effectively conceding that the success of his takeover plan lay in the Esot’s hands and encouraging its members to back the deal. It is unlikely, however, that O’Leary had failed to see the rejection coming. He had never sugarcoated his plans for an Aer Lingus under his control, instead pledging to go to war on the airline’s cost base.
As recently as last Tuesday, the day before the result of the Esot vote was known, he derided Aer Lingus management for being ‘‘soft on staff costs’’ and for granting ‘‘excessive pay increases.
‘‘Ryanair believes Aer Lingus is over-staffed,” he wrote in a letter to shareholders - hardly the sentiment that he would have expressed if he seriously expected the Esot to get behind him.
But this was not the first of O’Leary’s tactics to suggest that he may not have been as committed to the goal of an immediate takeover of Aer Lingus as it first appeared.
The plan was always ambitious with less than 60 per cent of the company available to buy in the predictable event that the government and the Esot decided to retain their stakes.
He shunned the approach that proved successful on two occasions for buyers of Eircom, the other former state company in which employees had a significant interest.
Both deals saw the buyers, the Valentia consortium and more recently Babcock and Brown, strike partnership deals with the Eircom Esot to get them on board and retain them as part-owners of the acquired business.
Although O’Leary said he was prepared to work with the Aer Lingus Esot as a fellow shareholder, he placed less emphasis on the need to sweeten the deal and instead lumped it in with other shareholders with a take the money or leave it approach.
His previous track record on union relations would have required him to be even more conciliatory, not less, than Valentia or Babcock.
But perhaps the most revealing sign of O’Leary’s true intentions, in retrospect, was the manner of his bid, which was made after he built up a 16 per cent stake within days of Aer Lingus making its stock-market debut.
News of the approach sent the share price soaring from €2.51 to over €2.80 immediately, removing the scope for Ryanair to meaningfully increase its stake. It could only acquire a further 3 per cent at prices less than €2.80 and was precluded from buying at prices above €2.80 under stock exchange rules.
O’Leary dismissed early questions over whether his bid was serious, saying he was spending the serious sum of €200 million on his initial stake in the airline. But he also considered the likely consequences of making the takeover offer with just 16 per cent of Aer Lingus in his pocket, when he could have simply disclosed his interest at that point without going as far as making a full bid. He would then have been free to build a stake without the €2.80 constraint, up to a maximum of almost 30 per cent - a much stronger position from which to mop up the remaining 20 per cent necessary to assume control.
It is also worth noting that Ryanair made no effort to increase its stake over the last two weeks, when the Aer Lingus share price dipped back below the crucial €2.80 threshold.
This was either a signal of acceptance that the bid had failed, or one of O’Leary being happy that he held as many aces as he needs for now.
As the Aer Lingus share price dipped towards the €2.65 mark last week, non-aligned shareholders were left to look towards Mannion’s team, which has spent considerable time arguing that €2.80 undervalued the company and that the best prospects for a higher share price lie in remaining independent.
Investors will make up their own minds over the weeks and months ahead. While Mannion now has one eye fixed on his share price and is reliant on an unlikely alliance of politicians, employees and billionaires to keep Ryanair at bay, O’Leary can sit and wait, comfortable in the knowledge that no one else can take over the main competitor in his home market.
If the share price continues its downward trend and the bottom line starts to hurt as the airline struggles with even more intense competition from Ryanair, his mantra that €2.80 per share is ‘‘a generous offer’’ may ring in shareholder ears, and look even more generous if Aer Lingus cannot deliver a higher price on its own.
Mannion, meanwhile, was given an unwelcome ultimatum last week by the Takeover Panel, which said he had just a week to provide more details on the cost-cutting plan he paraded as part of his defence strategy.
It will be difficult to do this without treading on union toes.
So, while Mannion and the Esot enjoy a slender lead, they may worry that the final whistle is now in O’Leary’s lips. And the game may just be beginning.