Bloomberg News

Lufthansa Said to Reach Deal to Sell BMI to British Airways

November 15, 2011

(Updates with analyst comment in fifth paragraph, today’s shares prices and company responses starting in seventh.)

Nov. 3 (Bloomberg) -- Deutsche Lufthansa AG has reached a draft accord to sell its U.K.-based BMI unit to British Airways parent IAG and the carriers are engaged in final negotiations on the deal, two people with knowledge of the plan said today.

A memorandum of understanding on the sale of BMI’s mainline operations has been signed by the carriers and is likely to be disclosed when IAG announces earnings tomorrow, said the people, who declined to be identified because the talks are private.

Lufthansa has been seeking a buyer for BMI after failing to turn round an airline added under duress in 2009 when then-owner Michael Bishop exercised a put option. The German carrier said last week it was contemplating multiple bids while exploring “various disposals and strategic options” for the U.K. unit.

Buying BMI would bring access to the 8.5 percent of takeoff and landing slots that the carrier controls at London’s capacity constrained Heathrow airport, the busiest in Europe. British Airways is already the No. 1 operator there and added to its holdings with the purchase of six of BMI’s slots in September.

Lesser Evil

“It’s good news for Lufthansa as the loss-maker drops out of the equation and they don’t have the restructuring problem,” said analyst Nils Machemehl at BHF Bank in Frankfurt, who has a “market weight” rating on Lufthansa. “From a profit perspective it would be positive if it were given away for nothing, but I think the price will be higher through the Heathrow slots.”

BMI has no strategic role for the German company, and the advantage handed to IAG is a lesser evil than sustained losses, Machemehl said, adding that the buyer might have to surrender some Heathrow slots to satisfy antitrust regulators.

Lufthansa, Europe’s second-biggest airline, rose as much as 2.8 percent and was trading 2.3 percent higher at 10.08 euros as of 12:35 p.m. in Frankfurt. The Cologne-based company declined to comment on any communications about the disposal of BMI.

IAG, or International Consolidated Airlines Group SA, the European No. 2 formed in January from a merger of British Airways with Spain’s Iberia, advanced 1.9 percent and was later priced up 1.1 percent in London.

The company has no comment on issues relating to BMI, spokeswoman Lorena Monsalves said today. Chief Executive Officer Willie Walsh has previously expressed on interest in a takeover on numerous occasions spanning almost two years.

Regional Division

Castle Donington, England-based BMI said last week it was in “advanced” talks on the sale of its regional operation, a separate business based in Aberdeen, Scotland, to U.K. investors with experience in that part of the market. There’s no change to the status of that transaction, one of the people said today.

BMI had an operating loss of 154 million euros ($212 million) in the first nine months, widening from 90 million euros a year earlier, Lufthansa said Oct. 27, adding that it’s unlikely to match 2010’s full-year sales and earnings.

A deal to sell BMI to British Airways would come as a blow to U.K. billionaire Richard Branson’s Virgin Atlantic Airways Ltd., BA’s biggest long-haul rival at Heathrow. Virgin CEO Steve Ridgway said Oct. 11 the carrier was looking at a bid of its own after Branson had pursued a tie-up for more than a decade.

Lufthansa said in September it had hired a bank to help determine whether to sell BMI or persist with a turnaround plan. While the memorandum has been signed with IAG, talks haven’t been exclusive, though other candidates aren’t as seriously interested, one of the people said today.

--Editors: Chris Jasper, Heather Harris.

To contact the reporters on this story: Steve Rothwell in London at srothwell@bloomberg.net; Alex Webb in Frankfurt awebb25@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net


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