DLAKF - The Italian Government Had Chosen Air France Over The Favorite MSC-Lufthansa Consortium

Summary

• The Air France-KLM consortium will start an exclusive negotiation for ITA.
• Even if it did not believe in this deal at first, we are surprised to see the twist at the Italian Government level.
• Concerning Deutsche Lufthansa's valuation, we see no implication. The stock price barely moved today.

It is not the first time that we have commented on ITA Airways, which is the new air flight operator born from the Alitalia ashes with a less capital-intensive structure (and is already profitable). In our previous publications, we detailed how MSC was interested in buying an equity stake with Deutsche Lufthansa ( DLAKF ; DLAKY ) on board as an industrial companion. Our internal team was not a believer in the deal, but we were reporting the CEO's words that said :

During the Q2 analyst call presentation, he also emphasized how ITA Airways needs a strategic partner, and " we think we are the right one ".

Today, we were surprised to read the announcement from the MEF (The Italian Ministry of Economy and Finance). Surprisingly, the MEF chose the French-American consortium for the exclusive negotiations. The possibility for the Treasury to count more in the future management of ITA tilts the balance towards the American fund Certares and the giants of the skies Delta ( DAL ) and Air France-KLM ( AFRAF ; AFLYY ), whose offer was deemed to be more in line with the objectives set.

An exclusive negotiation will start today and the final signing will be supported only " in the presence of content that is fully satisfactory for the public shareholder ". So, the consortium formed by MSC, the world leader in logistics and cruises founded by the Italian Gianluigi Aponte and the German airline Lufthansa is out of the game. MSC-Lufthansa's proposition for ITA amount to €800m for 60% to MSC, 20% to Lufthansa, and the remaining 20% ??to the Italian Government. Whereas, the Certares fund offered about €600 million for 55%, leaving 45% to the Treasury and also guaranteeing the future entry into the shareholding of the two allied carriers (the American Delta is the first airline in the world and Air France-KLM for which the proposition is to enter under 10% of the capital). Less money on the table but the possibility for the public shareholder (who will appoint two out of five directors on the board, including the non-executive chairman) to weigh in on the strategic choices of the company.

Conclusion

Concerning the valuation, if the acquisition was successful, it would have had a small positive impact on the German airline company. Our internal team was more optimistic about Deutsche Lufthansa's relationship with MSC (given the importance of Lufthansa's cargo business). Numbers in hand, Deutsche Lufthansa's equity stake was supposed to be at 20%. With the Italian latest decision, the Government will have decision-making power, which, however, in the context of complex groups such as Lufthansa collides with the harmony of the group development. Even at the board member level, the German flight operator would have only one representative.

No comment on the MSC side while Deutsche Lufthansa reported that "w e take note of the decision. We are still convinced our offer with MSC is the better solution ". The spokesperson also explained how the Italian Government had chosen the solution to have more influence over the company's future.

No material implication on Lufthansa, and after having commented on the Q2 performance , we remain neutral preferring other names in the sector, Ryanair and Deutsche Post , in particular.

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