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Cablegate: Holding Pattern for Ryanair Takeover Bid of Aer

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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

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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

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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.

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