Sir Richard Branson remains optimistic of sealing a merger between his Virgin Atlantic Airways and BMI British Midland before the end of the year, provided BMI's chairman, Sir Michael Bishop, gives up a lucrative "put" option to sell control of his airline to Germany's Lufthansa.
BMI sources have confirmed that Sir Michael has the right to make the German flag-carrier buy out his controlling shareholding in the airline under an agreement dating back to 1999, when Lufthansa acquired its initial 20 per cent stake. Lufthansa paid £91.4m for the shareholding, valuing BMI at £457m.
Lufthansa does not, however, have a "call" option entitling it to buy out Sir Michael at any pre-arranged future date.
The "put" option is understood to entitle Sir Michael to sell his controlling shareholding to Lufthansa for the same price that it paid for its shares in 1999. This would enable Sir Michael to make £229m from the deal.
Sir Michael, who founded BMI in 1978, controls 50 per cent of the airline plus one share. Lufthansa raised its stake to 30 per cent minus one share in November last year after Sir Michael exercised part of his put option with the blessing of the German carrier. The remaining 20 per cent is held by the Scandinavian carrier SAS.
Sir Richard was not prepared to discuss the details of BMI's ownership, but he said: "The logic of a merger is overwhelming. I would be surprised if something doesn't happen by the end of the year."
Merger talks between the two airlines broke down in May after the two sides failed to agree on price. Virgin insists that the negotiations were at an advanced stage, although Sir Michael later insisted that no serious talks had taken place.
Virgin has the right to operate transatlantic services from Heathrow but it lacks sufficient runway slots and a feed of European transfer passengers. BMI has 13 per cent of all slots at Heathrow and a big domestic and European network but is barred under the current UK-US air services agreement from serving America from Heathrow. Lufthansa and Singapore Airlines, which owns 49 per cent of Virgin Atlantic, are also both members of the Star Alliance, which includes BMI.
However, Sir Michael has got to be persuaded that a merger with Virgin would unlock more value than could be realised from exercising his put option on Lufthansa. BMI plunged £19.6m into the red last year - its first loss in 10 years - and expects to make a further significant loss this year, whereas Virgin made a £10m profit. But Sir Michael insists BMI is financially robust with £158m of cash on its balance sheet whereas Singapore Airlines had to inject £25m into Virgin Atlantic last year.
BMI is a fifth of the size of British Airways and has half the number of Heathrow slots that BA possesses, but a price tag of £457m would value BMI at a 20 per cent premium to BA.
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