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Aeroflot in $940M Bid for Alitalia

Aeroflot has teamed up with Italy's UniCredit bank to bid for a stake in ailing Italian airline Alitalia in a deal worth up to 700 million euros ($940 million), the Italian Finance Ministry said Monday.

If successful, the bid would be Aeroflot's first foreign acquisition and would boost its position in the crucial European aviation market. It could give Aeroflot the chance to get its hands on new foreign-built planes without paying the crippling import duties such planes currently face when brought into Russia.

"Aeroflot has submitted a letter to the Italian Finance Ministry about its intention to participate in a bid for shares in Alitalia," said Irina Dannenberg, head of Aeroflot's press office.

Sergio Ermotti, head of UniCredit's investment banking unit, told reporters in Milan on Monday that Aeroflot was bidding together with UniCredit, Italy's largest bank by assets.

"Aeroflot has a history of restructuring, and the carrier can bring know-how to Alitalia," Ermotti said.

Ermotti said Aeroflot would have a 95 percent stake in the bidding group, with the other 5 percent going to UniCredit.

"There is a willingness to consider the entry of other industrial partners into the shareholding structure, if the [Italian] Finance Ministry will allow it," Ermotti said.

Aeroflot shares rose 5.6 percent to 78 rubles ($3) on the MICEX index.

The Italian government, which owns 49.9 percent of Alitalia, hopes to sell at least a 39.9 percent stake in the airline by mid-2007. Under Italian law, anyone buying a 30.1 percent stake in the company would then be automatically required to bid for the entire company, which is valued at about 1.4 billion euros ($1.9 billion).

Potential investors had until Monday morning to link up with one of the companies eligible to submit nonbinding bids for Alitalia stock by April 16.

The struggling airline has long been viewed as a potential takeover target since the Italian government abandoned attempts to revive the carrier's fortunes. Alitalia posted a 405 million euro ($540 million) pre-tax loss for 2006.

Aeroflot faces competition from a consortium comprising Italian bank Mediobanca and U.S. investment funds Texas Pacific and Matlin Patterson, the Italian Finance Ministry said.

Analysts expressed some surprise at Monday's announcement, but said Aeroflot was known to be eyeing European airlines.

"I would say it was quite a shock for us, but not too much given that Aeroflot has been looking for European acquisitions for some time," said Yelena Sakhnova, an aviation analyst at Deutsche Bank.

In 2001, Aeroflot began an ultimately unsuccessful bid to buy a stake in Virgin Express Ireland.

Sakhnova said there were some powerful incentives for Aeroflot to expand into the European market, including diversification of the business and access to new connections and a broader network.

"The most important thing is that Aeroflot would be able to lease foreign aircraft and put them on routes to and from Russia without paying custom duties," she said.

"That is 20 percent custom duties and 18 percent VAT and that adds almost another 40 percent to the aircraft value."

Sakhnova questioned the wisdom of targeting a company in Alitalia's condition, however.

"The problem with Alitalia is that the unions are quite strong [in Italy] and you have huge pension liabilities. All these things are not typical for Russia," she said.

With Aeroflot's bank balance standing at a healthy $100 million in the black, the company's planned expansion could prove a catalyst for eventual privatization as the carrier seeks to raise money for acquisitions, UralSib analyst Andrei Nikitin said.

"Potentially, they will be left with no choice but to sell the 61 percent government stake in the company," Nikitin said.

Analysts shied away from linking Aeroflot's bid with the wider trend of cash-rich big Russian businesses looking abroad, citing the peculiarities of the aviation industry.

"Aeroflot wouldn't just follow some trend with nothing positive in it for the company. The airline business is very difficult and it's not like oil and gas or metals. It shows considerably lower margins and they have to be far more careful," Sakhnova said.

Sakhnova said it was difficult to speculate on the likelihood of Aeroflot's bid succeeding but said warm political relations between Russia and Italy could help the bid.

President Vladimir Putin visited Italy in March and Italian energy firm Eni is set to bid for Yukos assets in an auction Wednesday.

"There is always a political issue in all such deals," Sakhnova said.

(The Moscow Times 03.iv.07)

 
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