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.

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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.


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