UPDATE – Not Lufthansa and MSC Group, but the consortium of Certares, Delta Airlines, and Air France-KLM seems to be in pole position now to buy a majority share of Italian airline ITA Airways. The Italian Ministry of Economy and Finance has selected the consortium to launch “exclusive negotiations”, it said in a brief statement on August 31. Certares consortium in pole position for ITA Airways stake.
The bidding for ITA Airways has been ongoing since the government issued a decree in February. Although the deadline for the final bids closed on May 23, bids have been amended and allowed to become part of the selection process. A final government decision was initially set for June 24, but then postponed as Prime Minister Mario Draghi resigned after losing his majority in parliament.
It was thought that only a new government after the September 25 elections would select the winner of the bidding, but Rome has been under all sorts of pressure from unions, ITA staff, and bidders not to wait too long. The ‘final’ proposals of the third round of bidding were entered on August 23.
Binding agreement is expected on September 10
The result is today’s announcement by the Ministry of Economy and Finance. In the statement, it says that the offer from Certares Management LLC, Delta Airlines Inc., and Air France-KLM S.A., “was considered to be more in line with the objectives set by the Prime Ministerial Decree (on the sale of ITA, as set out in February). At the conclusion of the exclusive negotiations, binding agreements will be signed only in the presence of contents that are fully satisfactory to the public shareholder.” It is believed that the Draghi government targets September 10 as the date to finalize the agreement.
According to Corriere Della Sera, the Certares consortium has offered to buy 55 percent of ITA Airways for €600 million, leaving the remaining 45 percent to the Italian state. The state will be entitled to sell its stake but at an unspecified date. Delta and Air France-KLM are said to have offered ITA the strengthening of its Rome hub and making it an instrumental part of the important transatlantic network. The state would also have a major say in the nomination of ITA’s non-executive president and its CEO.
This offer compares to €800-850 million for a combined 80 percent share from shipping group MSC and Lufthansa, which would be split 60/20, plus 20 percent for the state. The government would have an option to sell its stake at a specific date for a €100 million ‘bonus’, which is conditional on the results of ITA under the management of the Swiss/German combination.
Blow for Lufthansa and MSC
Losing out to the Certares consortium would be a huge blow to Lufthansa. CEO Carsten Spohr has consistently signaled how important the addition of ITA Airways to the Lufthansa Group would be, given the importance of the Italian market. Newspaper Il Sole 24 Ore quotes the airline in a media statement, saying that “without collaboration with ITA, Lufthansa Group maintains a strong position on the Italian market. With Air Dolomiti and our other brands, we already have a strong position.”
By contrast, Air France-KLM has never shown public enthusiasm for partnering with ITA. At first, Group CEO Ben Smith said that both airlines were unable to make any acquisitions, given the restrictions that were part of the state aid from the French and Dutch governments to Air France and KLM. These have been lifted since they have repaid most of the state-backed loans, but both airlines remain wary of starting a new investment adventure in Italy. Smith said in February that ITA “is of interest to us, but it is quite risky based on our past experience” when the French-Dutch airline lost €119 million on its €323 million investment in 2009. That’s why the airline group wants to limit its role to a commercial alliance through SkyTeam and will not participate in an equity investment in ITA.
Delta Airlines, which has a 5.8 percent share in Air France-KLM, is keen on expanding its existing partnership with ITA, which it started with a reciprocal codeshare agreement on December 22 last year. It covers the ITA code on 92 Delta destinations and the Delta code on 33 ITA destinations. Although it is an airline with deep pockets, Delta has no intention either to invest directly in ITA, preferring a role via New York-based private equity investor Certares to reduce the risks of the acquisition.
For now, only a commercial role for Air France-KLM and Delta
An Air France-KLM media statement issued later today confirms the limited position of the two airline groups. Air France-KLM says it “welcomes the announcement by the Italian Government granting the exclusivity to the Consortium formed by Certares – as equity partner – and Air France-KLM and Delta Air Lines – as commercial partners – for the next phase of the negotiations for the potential acquisition of a participation in ITA Airways held directly by the Ministry of Economy and Finance of the Italian Government.”
The statement adds: “Should this operation be concluded, Air France-KLM would become a commercial and operational partner of the Italian airline, as part of the consortium led by Certares. Air France-KLM at this stage is not investing in ITA’s capital structure. However, Air France-KLM Group could consider in the medium term taking a minority stake in ITA.”
Air France-KLM says that throughout the bidding process, “Certares, Air France-KLM, and Delta Air Lines notably emphasized the strong commercial opportunities this deal would bring ITA subject to obtaining all relevant approvals. This includes an increased presence on the North Atlantic axis, on which Air France-KLM, Delta, and Virgin Atlantic operate the largest joint venture, as well as the opportunity to build an exclusive partnership between Air France-KLM’s Flying Blue, Delta’s Sky Miles, and ITA’s Volare – one of Italy’s largest frequent flyer program -, to the benefit of the Italian carrier’s customers.”
