Ryanair, Europe's biggest budget airline, launched a surprise bid for Aer Lingus on Thursday, valuing the former Irish state carrier -- which listed just four days ago -- at EUR1.48 billion euros (USD$1.9 billion).
Ryanair Chief Executive Michael O'Leary, who has long said he has no interest in the long-haul market, said Ryanair and Aer Lingus would be run as separate businesses.
Ryanair revealed it had already bought 16 percent of Aer Lingus in the market and would offer 2.80 euros a share in cash for the rest of the group -- a 27 percent premium to Aer Lingus's 2.20 euros per share flotation price. The shares closed on Wednesday at 2.51 euros.
The budget airline would retain Aer Lingus's staff and management and Aer Lingus would keep its own branding and continue to operate its mixed long-haul and short-haul business -- but Ryanair said it would help it drive down costs.
In turn Ryanair would benefit from Aer Lingus's superior earnings yield, which is better than the returns Ryanair can currently get on its cash deposits.
"This offer represents a unique opportunity to form one strong airline group for Ireland and for European consumers," O'Leary said in a statement.
The government said it would not sell its remaining 28 percent stake but O'Leary told reporters that while he was targeting at least a 50.1 percent controlling stake he would be happy to have the government, with whom he has often clashed in the past, as a minority shareholder.
Only if Ryanair can get a sizeable holding in Aer Lingus would it delist the company, he added.
Under takeover rules his company can continue to buy in the open market -- at not more than the offer price -- until it reaches a stake of just under 30 percent.
O'Leary said he did not expect to face competition issues over the deal and that Ryanair and Aer Lingus's networks only overlapped on 17 of their combined 500 routes.
Aer Lingus, and its employee trust which holds around 15 percent of the group, were not available to comment and only issued a brief statement over four hours after Ryanair announced its bid, saying it was considering the announcement and would make another statement in due course.
Meanwhile the airline's main union, which opposed privatization, said the takeover would be bad for Ireland. Ryanair does not negotiate with unions in its own business but said Aer Lingus would be able to operate as at present.
Exane BNP analyst Nick van den Brul said the deal could get cleared by competition regulators although the groups may have to sacrifice a few routes.
"There would almost certainly be a competition investigation by the EU but it doesn't look insurmountable," he said.
Van den Brul said investors would also want to be reassured the deal would not make Ryanair less profitable given Aer Lingus's lower margins and added some might be disappointed if a deal dashed hopes of Ryanair returning cash to shareholders.
Ryanair's Chief Financial Officer Howard Millar said if the deal was successful it would have a "small upward impact on margins".
Collins Stewart analyst Andrew Fitchie said strategically the logic was "infallible" for Ryanair and would create "a fantastic Irish champion in terms of the combined entity".
The takeover would create an airline with about 50 million passengers annually, capable of competing with large European airline alliances and groupings like Air France-KLM and Lufthansa-SAS-Swiss.
Aer Lingus -- which had a valuation at listing of about 12.7 times earnings per share for calendar 2006, broadly in line with British Airways -- went to the market to raise money to help it with a planned EUR2 billion (USD$2.54 billion) fleet expansion, which includes upgrading its long-haul operation.
O'Leary said he would want Aer Lingus to continue with that aim and would want the former state operator to upgrade that service so it included beds and other high-end services.
Ryanair also said its buying power would give Aer Lingus added negotiating strength to buy new planes either from Ryanair's preferred supplier Boeing or from Aer Lingus's usual supplier Airbus.
