Ryanair Makes a Bold Move

Irish airliner Ryanair (Nasdaq: RYAAY  ) made a surprise $1.88 billion bid for Aer Lingus late last week, less than a week after Aer Lingus went public, and the shockwaves rattled the aviation markets around the world. The offer values the company at 2.80 euros a share, up considerably from its IPO price and from where the marketplace valued the company at 2.20 euros a share earlier that week. The move certainly qualifies as bold in anyone's book.

Ryanair has acquired 19.2% of the company in the open market, but faces stiff opposition to the merger from the Irish government, which controls a 28% stake, and the Aer Lingus employees who own 15% of the company. Even if Ryanair can obtain a majority stake (still an open question), CEO Michael O' Leary is now almost certainly faced with the unenviable task of convincing European Union officials to bless the merger -- officials whom he has previously referred to as "dimwits" and "practitioners of North Korean economics."

First, let's outline O'Leary's case for the acquisition, and the benefits that Ryanair sees in combining the two companies. Strategically, it brings together Ryanair's low-cost, short haul network, and Aer Lingus's legacy model and its long haul, trans-Atlantic flights. By combining the two networks, it would allow Ryanair to funnel trans-Atlantic passengers directly into its large European network. It also would give Ryanair access to several highly coveted slots at London's Heathrow airport, and potentially (if the right U.S./EU agreements are concluded) allow the company to provide strong low-cost competition to British Airways (NYSE: BAB  ) on trans-Atlantic flights, which currently provide 75% of British Airways' profits. Finally, it would give Ryanair the size and scale to compete effectively on a global scale, with carriers like Air France/KLM.

The points against the acquisition vary from pointing out O'Leary's many vitriolic comments about European Union officials, unions, competitors, and even its own customers, to monopolistic concerns about air travel in Ireland. O'Leary's comments aside, the merger does make logical sense. When considering that the majority of the airline's business is outside of Ireland, focusing on one small market and ignoring the greater benefits that the merger brings strikes me as, well, political rhetoric. Pointing out, as Aer Lingus Chairman John Sharman did, that the offer "significantly undervalues" the business seems downright silly in light of the recent successful IPO, and presumably efficient market pricing. If the deal goes through, the most difficult challenge O'Leary will have is integrating the two companies' disparate cultures-- especially given Aer Lingus' unionized employee base, and O'Leary's well-known contempt for unions.

From this Fool's perspective, Aer Lingus' shareholders should take the deal offered, because the alternative -- turning it down and having Ryanair's low-cost model turned against the company -- would only be a losing situation.

More airline Foolishness:

JetBlueis aStock Advisorselection. For more promising stock picks from Fool co-founders Tom and David Gardner, sign up today for a free30-day trial subscription.

Fool contributorStephen Ellisdoes not own shares in any companies mentioned. You can see his holdings foryourself. The Motley Fool has a low-cost (free!)disclosure policy.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 516290, ~/Articles/ArticleHandler.aspx, 10/21/2016 12:48:02 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,114.48 -47.87 -0.26%
S&P 500 2,137.56 -3.78 -0.18%
NASD 5,249.53 7.70 0.15%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 12:32 PM
RYAAY $73.43 Down -0.87 -1.17%
Ryanair Holdings CAPS Rating: **
JBLU $18.54 Down -0.06 -0.32%
JetBlue Airways CAPS Rating: ****