The Government is preparing to mount a legal challenge on competition grounds to Ryanair's audacious €1.4 billion takeover bid for Aer Lingus, which came less than a week after the airline was privatised.
Senior sources said last night that Ministers had legal advice indicating that Ryanair's surprise approach for Aer Lingus could be vulnerable on a range of grounds because the two airlines dominate the Irish market.
The matter is expected to be determined by regulators in the European Commission, which has the power to block a takeover or impose a range of restrictions on the two companies.
Sources believe it may be open to the Government to seek to have the case referred to the Competition Authority in Dublin, but it was unclear last night whether it was willing to go down that road. Some sources suggest the authority would not have jurisdiction over the case because Ryanair takes in most of its revenues outside Ireland.
Ryanair said yesterday that its offer will lapse if the European Commission challenges the takeover on the grounds of concentration of ownership.
The airline said the offer would also lapse if the approach was referred back to a competition authority in an EU member state on the same basis.
Aer Lingus, which yesterday rejected the bid on the basis that it undervalues the airline, has set up a "defence team" to deal with the surprise approach from Ryanair, which the no-frills airline has dubbed "project bargepole".
This committee, made up of advisers to the company including AIB's subsidiary Goodbody Stockbrokers, Merrion Capital and Goldman Sachs, is likely to sound out other potential buyers or "white knights". Other more attractive trade purchasers such as Emirates Airlines may yet come forward.
As well as the issue of fair value, the company's defence is also expected to target competition issues while seeking to undermine the Ryanair bid as being difficult to execute successfully because of the opposition from the Government and employees.
Ryanair has offered shareholders €2.80 a share, a 27 per cent premium on the opening price of €2.20 when Aer Lingus was listed on the stock exchange last Monday. Ryanair chief executive Michael O'Leary said this would give the Government €500 million for its shares and would give Aer Lingus employees €60,000 each.
However, last night the Employee Share Ownership Trust (ESOT), which represents the staff shareholding, said that when tax was taken into account the actual figure was likely to be much lower.
Mr O'Leary said his plan would help to enhance, expand and upgrade the operations of Aer Lingus. He said the Aer Lingus management team would stay on and its brand would be retained, although its stock exchange listing would end.
Ryanair last night had almost 20 per cent of Aer Lingus shares, compared to earlier when it held 16 per cent. While 20 per cent is a considerable shareholding, the airline's share price ended the day's trading at €2.90. Because of this Ryanair may find it difficult to buy more shares in the short term and an improved offer may yet have to be issued.
The Government said it remained fully and firmly committed to competition in aviation markets. "It will not sell its shares in Aer Lingus," it said in a statement. Mr O'Leary said he would have no problem if the Government wanted to remain as minority shareholders.
He said the two airlines would continue to operate separately. European aviation was dominated by a small group of "mega carriers" and if Ryanair and Aer Lingus combined it could compete with these, he added.