It took longer than it ever imagined, but International Consolidated Airlines Group finally won the Government over to its €1.4 billion bid for Aer Lingus this week. It means that IAG and its Irish chief executive, Willie Walsh, now have the support of the State's 25.1 per cent stake in the airline as they set about launching a €2.55 a-share offer for the company.
Walsh played a key role in bringing some initially sceptical politicians on board over the past five months. And while the drama might have lacked fireworks, there was, as usual, plenty going on behind the scenes .
IAG began to seriously consider making an offer last September, when a number of things were coming together. Aer Lingus’s efforts to carve itself a significant slice of the transatlantic market were paying off. Crucially, the airline was finally closing on a resolution of a €750 million pension problem that once seemed intractable.
Along with that, the biggest shareholder, Ryanair, had been wrestling for a year with an order from the UK's competition regulator demanding that it cut its 29.8 per cent stake in Aer Lingus to 5 per cent. It was preparing an appeal and faced the prospect of further legal battles just to hold onto its stake if that failed. There was also a view that it had lost any real interest in its rival.
The Government was gearing up to sell its interests in the banks as one of its agencies, Nama, was offloading property-related debt to mainly multinational buyers. To outsiders, getting the State to part with its 25.1 per cent stake might have looked straightforward.
However, Walsh knew it would be anything but, as getting agreement would involve satisfying the demands of a host of different constituencies, namely the Aer Lingus board, the Government, trade unions, Ryanair, local interests in Cork and Shannon, and politicians of every hue. All had conflicting priorities – not least the politicians, whose eyes remain fixed firmly on the next election.
One source argues that only Walsh could have pulled it off. "Can you imagine the head of Air France or Lufthansa dealing with that kind of Irish agenda?" he asks.
The board first
IAG recruited heavy-hitters, such as
Deutsche Bank
, into its corner and began preparing itself for battle. It set its initial sights on the airline board, after which its plan was to focus on getting Government to agree to sell the State’s stake.
On December 14th, shortly after the pension resolution had cleared its final hurdle, the group made its first approach, telling the Aer Lingus board that it was prepared to pay €1.23 billion for the airline. The board rejected this as it did a second, valued at €1.28 billion which IAG made on December 29th, when most of the world was on its Christmas holidays.
At the end of January, following a few more weeks of speculation, and not much else, IAG got its first break. After a series of meetings through the last weekend of the month, the Aer Lingus board said it was prepared to accept the group’s third proposed offer of €2.55 per share, or nearly €1.4 billion. It was thought that would be enough to satisfy most institutional investors, although some were pushing for more.
IAG’s offer was conditional on acceptances from the Government and Ryanair. Although there were no guarantees of this, it looked like the bid was set to roll forward. What followed instead was a sort of phoney war, with no side making any visible advance.
Within Government circles and, to a certain extent, Aer Lingus, the feeling was that IAG wasn’t selling the deal. By early February, there was a sense that the momentum gained the previous month had been lost and that the opportunity itself could slide out of IAG’s grasp.
Walsh flew to Dublin on February 10th and spent a few days meeting Government officials, the media and politicians. During this visit, he confirmed to the Oireachtas Committee on Transport and Communications that IAG would guarantee Aer Lingus services to Heathrow for five years, famously adding that it would be his best offer.
Despite the inevitable wall-to-wall coverage, in the wake of Walsh's visit many believed that the message had not got through politically. The corporate side quietly groaned when Paschal Donohoe, the Minister for Transport, Tourism and Sport, announced that he was referring the proposal to a cross-departmental expert group.
Most saw this as a way of postponing a decision – or even not making one at all.
If there was a breakthrough moment, it was at the end of the week of Walsh's visit, when Aer Lingus chairman Colm Barrington and chief executive Stephen Kavanagh issued a joint statement saying that the IAG offer was good for the airline, shareholders and the country as a whole.
They repeated this days later to the same Oireachtas committee that had grilled Walsh. But it was the statement itself that apparently had the most impact politically, prodding the coalition, or at least the Fine Gael side of it, to move forward.
“It was heard loud and clear by the politicians,” says one observer. “This was Colm Barrington and Stephen Kavanagh saying in no uncertain terms that this was in the best long-term interests of Aer Lingus.” The key point, he added, was that the message was coming from the airline’s executives and board, rather than IAG, which would have just seemed self-interested if it had said anything more.
No from Donohue
On February 24th, Donohoe issued a statement saying that the Government was not willing to sell the stake based on IAG’s terms. But he also outlined the Coalition’s key concerns, which were mainly the well-rehearsed points about Heathrow slots and connectivity, and made it clear that the door was still open.
It was from this point that things began to inch towards this week's conclusion. The Government's expert group included John Fearon, Assistant Secretary in the Department of Transport; Eileen Fitzpatrick, from State agency New Era; and IBI chief executive Tom Godfrey. The group began a series of meetings with IAG and its advisers. The airline group's representatives included staff from general counsel Chris Haynes's department.
According to sources, it was clear at this stage that a deal could be done and hinged on hammering out an agreement that worked for both sides. The process turned out to be exhausting, beginning with finding a way of safeguarding the Heathrow slots.
The B-share mechanism on which it is proposed to found those protections was developed comparatively late in the day. The two sides had to come up with something that was both legally enforceable and did not break EU State aid rules. As a result, a number of points had to be referred to Brussels. There was a brief scare when it looked like one EU directorate would have a problem with the B-share, but it was quickly cleared up.
If there was a crunch issue, it was the five-year guarantee that Heathrow services between Cork, Dublin and Shannon would be maintained at their current levels . The Government did attempt to get 10 years on the table, which was never going to fly, but it did get seven.
The Minister for Transport played his part in this. In February, Donohue said that five years was not enough and he was not prepared to back down. As it turned out, Donohue drove a hard bargain, which Walsh alluded to earlier this week.
Sources say the Minister turned out to be a tougher negotiator than some expected. The issue itself also turned out be tougher than expected.
Guarantee gulf
By late last month, both sides had worked comprehensively through the finest detail involved in most of the issues, but there was still a gulf between them when it came to the guarantee. If anything really had the potential to derail the talks, it was that.
In the end, seven years emerged as an acceptable figure, and the compromise was effectively five-plus-two, whereby IAG is happy to extend its five-year pledge for two more years, as long as airport charges remain at an acceptable level, with an agreed formula for determining what actually is acceptable. In essence, it allows both sides to argue that they got what they wanted.
The commitments given to Shannon, Cork and, ultimately, Knock were added as the process was nearing its end. By last weekend, it was ready to go to Cabinet, but it was not added to the agenda until the last minute. This allowed backbenchers to be briefed and gave Aer Lingus’ Kavanagh time to write to the unions.
The only remaining question mark hung over the one thing that neither side could control – Ryanair. IAG had hoped to receive a commitment from the airline to sell its shares, but in the end was happy that Ryanair simply adopted a neutral position until such time as it received an offer.
With the Government on board, the focus has shifted in that direction, as Ryanair is now in a position to make – or break – the deal.We could yet see some fireworks.
