Alitalia accepts €139m France-KLM offer

Alitalia, the ailing state airline, yesterday accepted a takeover offer from Air France-KLM that values it at just €139m (£107m), a fifth of its market capitalisation at the end of last week.

The low price tag on the deal – Air France's offer values Alitalia shares at 10 cents each, an 81 per cent discount to Friday's closing price – reflects the desperation of the Italian government to get shot of its 49.9 per cent stake in the company, which has been heading towards bankruptcy.

Alitalia said two weeks ago that it had less than €300m in cash remaining, having lost more than €3bn since 2000, and warned it could be forced to stop trading by the middle of the year. An auction of the company failed last summer when all three bidders pulled out. The airline revealed at the end of last year that it was entering exclusive talks with Air France-KLM, which was formed through a merger of the French and Dutch national carriers in 2004.

Alitalia's problems over the past 10 years include the emergence of the budget airlines Easyjet and Ryanair, which both now provide stiff competition in the airline's home market. However, the company is also regarded as inefficient and over-manned.

Alitalia's directors backed the deal yesterday morning, after a marathon board meeting to discuss the value of the offer, and Air France's three-year recovery plan for the airline, which aims to restore it to profitability by 2009.

The French company plans to cull 1,600 jobs from Alitalia as it cancels unprofitable routes and eliminates inefficiencies. It has also said it will take over only part of Alitalia's ground services division, which could mean the airline faces more job losses than publicly stated.

This business model is likely to put Air France at loggerheads with Italian trades unions, which must back the deal in order for it to go ahead. The takeover also needs clearance from the Italian government, which may take some time following the collapse of the administration led by Romano Prodi in January.

Opinion polls give Silvio Berlusconi a narrow lead in the race to form a new government in Italy, where a general election will be held next month. Mr Berlusconi has strong support in northern Italy, where Alitalia is predominantly based.

In addition to the €139m purchase price, Air France has also agreed to buy out the airline's convertible bond holders for €608m, taking its total outlay to €747m. The three-year recovery plan would be financed through a new €1bn bond issue.