Bloomberg News

Branson Seeks to Outflank BA With Rival Bid for Lufthansa’s BMI

December 13, 2011

Dec. 12 (Bloomberg) -- Richard Branson’s Virgin Atlantic Airways Ltd. is seeking to trump a bid from arch-rival British Airways for Deutsche Lufthansa AG’s BMI unit after persuading the German carrier to grant due diligence for a rival offer.

The books of Castle Donington, England-based BMI have been opened to both carriers and their proposals have an equal chance of success, Lufthansa spokeswoman Claudia Lange said today.

Lufthansa has been seeking a buyer for BMI after failing to revive an airline added under duress in 2009 when owner Michael Bishop exercised a put option. While selling to BA parent International Consolidated Airlines Group SA, which announced an agreement in principle on Nov. 4, might raise more cash, it would hand BMI’s lucrative operating positions at London Heathrow to one of the German carrier’s biggest competitors.

“They’ll be balancing strategic competitive questions against monetary value,” said Andrew Fitchie, a London-based Investec Securities analyst with a “hold” rating on Lufthansa and a “sell” on IAG. “Virgin might be seen strategically from Lufthansa’s perspective as a better place to sell the slots.”

Lufthansa’s was trading 4 percent lower at 8.75 euros as of 10:54 a.m. in Frankfurt, with London-based IAG -- formed in January from a merger of BA with Spain’s Iberia -- price down 3.3 percent at 148.30 pence. Virgin Atlantic is closely held.

Too Dominant

Virgin has agreed a term sheet with Lufthansa and is in talks “on the next stage of the purchase,” it said today, adding that BA is already too dominant at Heathrow and repeating calls for antitrust authorities to examine the IAG offer.

BMI would bring access to the 8.5 percent of takeoff and landing slots at capacity-constrained Heathrow, Europe’s busiest airport, which the successful bidder could deploy as it saw fit.

British Airways is already the No. 1 operator at Heathrow and took its holdings with sister company Iberia to 43 percent with the purchase of six BMI slots in September. Virgin is its biggest long-haul competitor, with 3 percent of positions.

Virgin said on the day that IAG announced its outline deal to buy BMI that it had made an approach of its own. Lufthansa signed an agreement allowing a bid from the Crawley, England- based company to go forward on Nov. 29, it said today.

Branson, who owns 51 percent of Virgin, has been chasing a tie-up with BMI -- formerly British Midland -- for more than a decade and failed to reach an agreement with Bishop on several occasions. The billionaire has also been seeking an alliance partner and possible investment for Virgin after BA won regulatory approval to deepen an accord with American Airlines.

Poor Timing

Lufthansa hopes to conclude a sale of BMI by the end of the first quarter, spokeswoman Lange said, declining to provide the price for either the Virgin Atlantic or IAG offer.

“The timing isn’t ideal,” Investec’s Fitchie said. “You’re expanding at Heathrow when the economic climate isn’t conducive to adding capacity. You could see a Virgin offer being attractive because it keeps it in the Star family. But this could also be a way of forcing the IAG price up.”

Virgin is 49 percent owned by Singapore Airlines Ltd., a partner of Lufthansa in the Star Alliance, though the U.K. carrier is not itself a member of the grouping.

BMI had an operating loss of 154 million euros ($205 million) in the first nine months, widening from 90 million euros a year earlier, Lufthansa said Oct. 27, adding that the unit is unlikely to match 2010’s full-year sales and earnings.

--Editors: Chris Jasper, Chad Thomas.

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

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


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