EU poised to make Ryanair sell Aer Lingus stock

The European Commission has laid the legal groundwork to force Ryanair to sell some or all of its one-quarter holding in Aer Lingus if the European Union turns down its takeover bid, according to a confidential charge sheet.

People familiar with the statement of objections (SO) say it concludes that low-cost Ryanair would lock up the Irish air market if it acquired the partly state-owned peer, leading to higher prices for travellers.

The commission will decide by June 13 whether Ryanair can take over Aer Lingus. Ryanair valued Aer Lingus at €1,48-billion in its original unsolicited bid.

“It’s fair to say that on the basis of its statement of objections, it looks like the EU is going to block the proposed merger,” Ryanair chief executive Michael O’Leary told Reuters this week, adding he intended to keep the minority stake anyway.

If it does block the merger, then Brussels would be poised to take the next step and order the sale of some or all of the stock. Ryanair was not available for comment.

The commission says Ryanair bought 19% of Aer Lingus shares less than 10 days before it launched a public bid for its rival and another 6% thereafter.
It now holds 25,17%.

The share purchases and the public bid are “considered to constitute a single concentration” under EU merger rules, the charge sheet said, according to people who have seen it.

Experts say that legal wording sets the stage for requiring Ryanair to sell off some or all of the Aer Lingus stock.

Aer Lingus requires 75% shareholder approval in some matters, which could give Ryanair an effective veto.

For that reason, one lawyer who has not seen the chargesheet reckons Ryanair could at most be forced to go below 25%.

“All they would be required to do is move into a non-controlling position,” said Stephen Kinsella of Sidley Austin.

But another competition lawyer, John Boyce of Slaughter and May in Brussels, has argued that the entire stake is at issue.

“Was Ryanair trying to acquire control? If so, they can be forced to sell off their stake to put an end to the deal.”

Head-to-head combat

The commission’s nearly 400-page statement of objections, including appendices, lays out reasons in great detail for prohibiting the merger. Kinsella cautions, however, that a strong SO does not necessarily mean a prohibition.

Companies can offer remedies to try to overcome competition problems. They can also challenge a commission prohibition in the European courts, which O’Leary said he expects to do.

The commission argues Aer Lingus and Ryanair are locked in a head-to-head combat, keeping each other in check but squelching attempts by other airlines to get a toehold in Dublin.

The two airlines have increased the routes on which they compete from eight to 37 over the past six years, driving down prices by 5% to 8%, the commission says.

Competition between Aer Lingus and Ruyanair has cut their cost per kilometre per seat below that of Easyjet, Virgin Express (now part of Brussels Airlines) and major carriers such as British Airways, a chart in the SO shows, the sources say.

Removing such competition would leave Irish customers “particularly vulnerable to price increases”, it argues. The commission lays out in detail the reasons why others would be unlikely to enter the market.

First, no other carrier has a base in Dublin. Ryanair and Aer Lingus can easily switch routes and gates, substitute aircraft and make other changes that rivals cannot match.

Most carriers see Ireland’s four million residents as too small a market to be worth contesting, the commission argues.

It analyses what the loss of competition would mean on each of the 37 competing routes. Anticipating a possible legal challenge, the SO includes an econometrics report, a separate economists’ report and a survey of passengers at Dublin airport. - Reuters

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