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### Viewing cable 06DUBLIN1189, HOLDING PATTERN FOR RYANAIR TAKEOVER BID OF AER

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06DUBLIN1189 | 2006-10-16 09:39 | 2011-07-22 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Dublin

`

    VZCZCXRO0028
    RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
    DE RUEHDL #1189/01 2890939
    ZNR UUUUU ZZH
    R 160939Z OCT 06
    FM AMEMBASSY DUBLIN
    TO RUEHC/SECSTATE WASHDC 7570
    INFO RUCNMEM/EU MEMBER STATES
    RUEHBS/USEU BRUSSELS

` `

    UNCLAS SECTION 01 OF 02 DUBLIN 001189

    SIPDIS

    SENSITIVE
    SIPDIS

    E.O. 12958: N/A
    TAGS: EAIR PREL ECON EI
    SUBJECT: HOLDING PATTERN FOR RYANAIR TAKEOVER BID OF AER
    LINGUS

    REF: COLEMAN-YOUNG E-MAIL OF OCTOBER 10 AND PREVIOUS

    ¶1.  (SBU) Summary: As Ryanair's takeover bid for Aer Lingus
    has slowed over the past week, Irish attention has focused on
    the approach that EU Commission competition authorities will
    take toward the envisioned merger.  Ryanair now holds a
    19-percent stake in Aer Lingus, with the Government retaining
    its 28-percent stake and employees buying additional shares
    to increase their stake to 15 percent.  Although Ryanair has
    not formally notified the EU Commission about its takeover
    bid, the Irish Government has started to prepare its case for
    DG Competition, with no apparent plans to request a referral
    to the Irish Competition Authority.  Ryanair remains
    confident that DG Competition will decide it its favor, while
    an Irish aviation consultant told Post that the two airlines'
    overlapping routes will make the EU's decision too close to
    call.  A Ryanair representative also criticized Irish
    Government comments questioning Aer Lingus' continued
    exercise of rights under the U.S.-Irish aviation agreement as
    an attempt to spook investors.  As the competition case takes
    shape, Ryanair CEO Michael O'Leary is in a strong position,
    having obtained, at least, a sizable stake in his primary
    competitor and additional leverage over decisions regarding
    the construction of Dublin Airport's second terminal.  End
    summary.

    Takeover Bid Update
    -------------------

    ¶2.  (U) The overall stake held by low-cost airline Ryanair in
    the recently privatized Irish national carrier, Aer Lingus,
    has hovered just above 19 percent since Ryanair CEO Michael
    O'Leary announced a surprise takeover bid for Aer Lingus on
    October 5.  On October 13, Aer Lingus stock finished trading
    on the Dublin Stock Exchange at euro 2.90 per share, as
    compared to Ryanair's offer price of euro 2.80 and Aer
    Lingus' original flotation price of euro 2.20.  In an
    apparent move to obstruct Ryanair's takeover bid, a group of
    Aer Lingus pilots purchased an additional 2-percent stake in
    the airline on October 10, increasing the stake held by
    employees to nearly 15 percent.  The October 13 Irish Times
    reported that a separate group of employees was considering
    the use of pension funds to purchase an additional 6-percent
    stake.  The Government's stake remains roughly 28 percent,
    with both Finance Minister Brian Cowen and Transport Minister
    Martin Cullen reiterating in recent days that the Government
    would retain its shares in the interest of aviation
    competition.  (The Government reduced its 34-percent stake to
    28 percent within the first two days of Aer Lingus'
    flotation, although Government officials had stated that they
    would sell off this 6-percent stake slowly to ensure against
    volatile initial trading.)

    The Looming Competition Case
    ----------------------------

    ¶3.  (SBU) The EU Commission's competition authorities will
    soon take center state on Ryanair's takeover bid, Noreen
    Mackey, the Legal Advisor to the Irish Competition Authority,
    told Pol/Econ Chief on October 13 (repeating press coverage
    on this likelihood).  Mackey explained that, under Ireland's
    1997 Takeover Panel Act, Ryanair had 28 days from the October
    5 date of its takeover bid announcement to mail a share offer
    to shareholders, a step that Ryanair had not yet taken.
    Ryanair would then be obligated to notify DG Competition
    about the bid, since the Ryanair-Aer Lingus entity would meet
    the necessary thresholds: operations in at least three EU
    Member States and combined turnover exceeding euro 100
    million.  DG Competition would have roughly four months to
    make a ruling, with no further recourse to Ireland's
    Competition Authority.  Mackey cited press reports that the
    Irish Government had begun to prepare a case for the
    Commission with help from Goldman Sachs, which had retained
    former Competition Commissioner Mario Monti as an advisor.
    In other words, the Irish Competition Authority had no plans
    at this point to exercise its right under EU legislation to
    seek referral of the Ryanair case from DG Competition.

    ¶4.  (SBU) DG Competition's ruling on the Ryanair bid will be
    too close to call, Pol/Econ Chief was told on October 14 by
    John Finnegan, Principal Consultant for Goodbody Economic
    Consultants (an arm of the brokerage that advised the
    Government on the Aer Lingus flotation) and formerly an
    official in DG Competition's aviation office during
    Commissioner Monti's tenure.  Finnegan observed that DG
    Competition's instinctive opposition to airline alliances in
    the 1990s had given way to a posture supportive of carrier
    consolidation.  In approving the Air France-KLM merger, for
    example, DG Competition noted that the airlines had different
    hubs and that rail links between France and the Netherlands

    DUBLIN 00001189  002 OF 002

    provided consumers with transport options alternative to
    aviation.  The differences in the Ryanair-Aer Lingus case,
    Finnegan remarked, were that the rail link alternative was
    moot and that the two airlines together would have a
    strengthened position at Dublin, their shared hub.  Moreover,
    the two carriers had a number of overlapping city-pair routes
    (19 to the same airports and 26 to the same city, counting
    Ryanair's service to secondary airports for the cities in
    question).  Finnegan questioned whether DG Competition could
    use landing slot forfeitures as an effective remedy in
    approving the takeover, since it was unclear whether other
    airlines would jump onto the routes that the two airlines now
    serve from/to Dublin.

    ¶5.  (SBU) Ryanair is confident that EU competition
    authorities will look favorably on the takeover bid, Ryanair
    Director of Regulatory Affairs, Jim Callahan, explained to
    Pol/Econ Chief on October 12.  He noted that DG Competition
    had demonstrated a consistent record in support of airline
    consolidation, such as in Germany, France, the UK, and
    Scandinavia.  Callahan observed that the takeover would serve
    consumer interests, as the application of Ryanair's low-cost
    model would help to reduce Aer Lingus' fares.  The takeover
    made sense in the context of relative size, with Ryanair
    carrying 42 million passengers per year compared to Aer
    Lingus' 8 million, and with Ryanair's fleet more than triple
    the size of the Aer Lingus fleet.  Aer Lingus, Callahan
    added, was a "small player" in the European and
    trans-Atlantic markets, and Government resistance to the
    takeover bid reflected an "emotional, politically driven"
    reluctance to lose control of the former national carrier.
    Because Ryanair CEO Michael O'Leary believed strongly in Aer
    Lingus' potential for enhanced shareholder returns, moreover,
    Ryanair would not sell its Aer Lingus shares even if the
    takeover bid were to fail, Callahan added.

    Questions about the U.S.-Irish Aviation Agreement
    --------------------------------------------- ----

    ¶6.  (SBU) Callahan described Transport Minister Cullen's
    October 6 comments questioning Aer Lingus' continued exercise
    of rights under the U.S.-Ireland air transport agreement in a
    takeover scenario as an attempt to spook investors and to
    distract attention from the Government's failure to
    anticipate the Ryanair bid.  (Cullen raised the questions
    after media reports noted that Ryanair might not be over 50
    percent Irish-owned.)  Callahan said that Ryanair was 54
    percent EU-owned, but "probably not" more than 50 percent
    Irish-owned.  Reiterating points made by Ryanair CEO O'Leary
    to the October 8 Sunday Business Post, Callahan said that
    Ryanair was nonetheless Irish-registered, Irish-regulated,
    Irish-headquartered, and Irish-managed and did not have
    rights to fly outside the EU from other EU Member States
    under existing aviation agreements.

    Comment: O'Leary Strongly Positioned
    ------------------------------------

    ¶7.  (SBU) The famously flamboyant Ryanair CEO, Michael
    O'Leary, appears to be strongly positioned whether or not the
    takeover bid succeeds.  Ryanair reportedly had euro 2 billion
    in available cash to launch the takeover, and he should have
    sufficient reserves to improve its share price offer, up to
    euro 3.50 by some estimates.  If DG Competition approves the
    bid and if Ryanair can obtain a 51 percent stake, O'Leary
    will be the first low-cost airline executive in Europe to
    take control of a legacy carrier.  If DG Competition
    disapproves or if Ryanair cannot reach the 51 percent
    threshold, O'Leary will still have a sizable stake in his
    primary competitor, with the value of his investment having
    already increased 30 percent based on Aer Lingus' initial and
    current share prices.  Perhaps as importantly, O'Leary will
    have more leverage over decisions to be made regarding the
    planned construction of Dublin Airport's second terminal,
    which was to cater primarily to Aer Lingus.  O'Leary will
    likely highlight his strong position as he attempts to
    describe the wisdom of his gambit to Ryanair shareholders,
    many of whom are still reportedly skeptical about the
    envisioned merger.
    BENTON

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