Ryanair in surprise £1bn bid for Aer Lingus

Ryanair, the low-cost Irish airline, made an audacious £1bn hostile bid for Aer Lingus yesterday, eight days after its domestic rival successfully floated on the London and Dublin stock exchanges.

The Irish government, which owns a 25.1 per cent stake in Aer Lingus, said it would not be willing to sell its shareholding in the carrier. However, Ryanair's chief executive, Michael O'Leary, said he would be happy to buy just 75 per cent of the company, claiming he intended to push ahead with his bid regardless.

Ryanair revealed yesterday morning it had already bought a 16 per cent stake in Aer Lingus, and offered to buy the remainder for €2.80 (£1.89) a share in cash, a 12 per cent premium to the company's closing price on Wednesday, and a 27 per cent premium to its float price. By the market close last night, Ryanair had increased its stake to 19.2 per cent.

Ryanair also claimed it had been largely responsible for the 14 per cent rise in Aer Lingus's shares since its floatation last week, pointing out that most of the price rises had taken place on days when it was accumulating its stake.

Aer Lingus swiftly dismissed the offer yesterday, claiming it was not in shareholders' best interests, and advising them to take no action in response to Ryanair's approach. "Aer Lingus is one of Europe's most profitable airlines, with a consistent track record for generating strong returns on its capital," it said. "It is well-positioned to benefit from numerous growth opportunities relating to both its long- and short-haul networks as a result of its strong market position in Ireland and the depth and experience of its management team."

The company said it would send shareholders a more detailed explanation of its rejection of the offer. John Sharman, Aer Lingus' chairman, added: "This approach is unsolicited, opportunistic and significantly undervalues the group's businesses and attractive long-term growth potential. In addition, the offer would raise regulatory issues as a result of Aer Lingus's strong position in its core markets."

However, Ryanair's chief financial officer, Howard Miller, said it was curious that Aer Lingus had made such a swift rebuttal of an offer pitched at €2.80, when it had been willing to sell its shares at €2.20 less than two weeks ago. "I didn't expect them to accept a bid just after their IPO," he said. "I'm sure they're deeply shocked and stunned, and they'll surely be coming out with a defence document. But maybe the directors didn't carry out their fiduciary duty if they are saying the company is not worth €2.80 a share this week, but were willing to sell it for €2.20 a share last week."

Ryanair said a combination of the two airlines would give the company a chance to compete with the other European airline alliances, such as BA/Iberia and Air France/KLM. It said if successful, it would cut Aer Lingus' short-haul fares by an average of 2.5 per cent a year for at least the next four years, but would keep the Aer Lingus brand separate.

Mr Miller dismissed the suggestion that a deal may run into problems with Irish competition authorities. "We've had strong legal advice that this is not a matter for Irish competition authorities, but for European authorities," he said. "There are a lot of precedents here."

The Irish Prime Minister, Bertie Ahern, insisted there would be a domestic competition issue. "The government is committed to competition in the aviation market and it will not be selling its shares in Aer Lingus," he said. The airlines overlap only on 17 out of 500 routes, all of which are between the UK and Ireland. The combined company would have some 50 million passengers a year, placing it closer to BA/ Iberia, which have 63 million.

Mr Miller added that Ryanair's aim was merely to attain the minimum 50.1 per cent of Aer Lingus, which it would need to have control of the company. He said it would not be important to own 100 per cent, as there were no plans to integrate the carriers. He said savings would be made by the greater bargaining power for buying aircraft, and by helping to reduce their operating costs and improve their business.

Shares in Aer Lingus closed up 16 per cent at €2.90, while Ryanair fell 0.8 per cent to €8.63.

O'Leary's views on Aer Lingus

"A lot of Irish people are being ripped off because there is no competition [in the Irish airline market]." - September 2006

"In the next 12 months, we will wipe [Aer Lingus] out in Europe. They weren't able to compete with us in Britain, so they switched capacity into Europe. Now, we are adding capacity into Europe and we are now going to destroy that market for them as well." - August 2006

"People in this country still look at Aer Lingus as being the big Irish airline when it is really quite a small regional airline now. It is an opportunity when Aer Lingus has to lift its skirts in an IPO prospectus about what their traffic is and their market share. People are going to see how irrelevant it is in this country." - August 2006

"[Aer Lingus is] providing a crap service with poor punctuality, high rates of lost bags and far more cancellations." - 2001