Aeroflot Pull-Out Threatens Alitalia Sale

June 27, 2007

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Aeroflot pulled out of the bidding for Alitalia on Wednesday, leaving Rome's auction of the unprofitable airline in danger of collapse with just two players left.

The Russian carrier's departure leaves smaller domestic airline Air One and US private equity fund MatlinPatterson as the only potential bidders ahead of a July 12 deadline to submit binding offers for the USD$1.6 billion airline.

The center-left government's headaches were exacerbated when Air One said it would slash 12 percent of Alitalia's workforce if it won control.

Though Aeroflot was not the favorite to win, its presence had given credibility to an auction lacking in big airline names and marred by the earlier departures of other contenders such as US fund TPG and Italian businessman Carlo de Benedetti.

Aeroflot, which was bidding with one of Italy's biggest banks UniCredit, cited a lack of access to crucial information on Alitalia and restrictive conditions on the sale that would have hampered its ability to turn around the carrier.

Air One has the backing of the country's largest retail lender Intesa Sanpaolo, whose chairman is a long-time friend of Prime Minister Romano Prodi.

Analysts had considered Air One and Aeroflot as the only serious contenders to buy Alitalia, and Italian media had speculated that MatlinPatterson could pull out soon or team up with the smaller Italian carrier's consortium.

Either of those two scenarios could leave the Italian government with the prospect of handing its national carrier to Air One, a much smaller airline whose annual revenues barely match the annual losses of its larger rival.

Abandoning the bid is a negative for Aeroflot as well, since a deal could have been a catalyst for the Russian carrier's privatization, said Uralsib Bank's Andrei Nikitin.

Aeroflot's withdrawal came as Alitalia's shareholders met on Wednesday to discuss the airline's precarious financial condition after writing down the value of its fleet last month.

Chairman Berardino Libonati asked them to approve using EUR150 million euros (USD$201.5 million) of reserves to reduce losses in the first quarter and last year.

The write down had pushed Alitalia's 2006 net loss to more than a third of its market value, triggering the need for a capital increase under Italian law and sparking fears that Rome might have to pump more money into the airline.

Air One, meanwhile, pressed on with its offer, meeting Alitalia's unions on Wednesday and outlining a plan to turn around the airline by cutting 2,350 jobs, negotiating new contracts and replacing part of its fleet with Airbus planes.

But critics say Air One, Alitalia's closest domestic rival, would have too much control over the Italian market with Alitalia in its pocket. The European Union signaled it could have objections.

Brussels blocked Irish carrier Ryanair's bid for compatriot Aer Lingus on Wednesday, saying that it would make it impossible for new airlines to enter the Irish market. It said it would handle other takeovers such as Alitalia's in a consistent fashion.

Italy's government, which launched the auction for Alitalia in December and has actively courted Russian political and business leaders in recent months, has been criticized by unions and the opposition over its handling of the sale.

Rome put its 49.9 percent stake in Alitalia up for sale after repeated restructuring efforts had failed to return it to profitability.

It attracted 11 bidders initially, before the list was shortened to three allowed to submit binding offers.

One of the three, US private equity fund TPG, pulled out soon after. MatlinPatterson was a partner in that group and returned to the fray earlier this month, after which Italy extended the deadline to submit binding offers.

Alitalia is burdened by strikes, losses and frequent government interference, and analysts say the airline would be lucky to find a buyer even at a price tag well below its market value.

(Reuters)