Etihad Alitalia 49 percent stake purchase agreed

An Etihad Alitalia deal has been agreed. The flag carrier airline of the United Arab Emirates (UAE) is to buy a 49% stake in Italy’s flagship airline Alitalia. The deal will be finalized “as soon as possible”, the two airlines announced jointly.

Negotiations have been ongoing since December, 2013. Italian media say that progress was delayed because Alitalia was unwilling to cut its workforce and restructure its debt as part of the deal.

Etihad Airways PJSC, the UAE’s second largest airline, has been pushing to reduce the workforce by 2,251 to 11,470.

The banking group Intesa Sanpaolo, which is both an Alitalia creditor and key shareholder, insists a debt restructuring deal is possible. Chairman Gianmaria Gros Pietro believes the Etihad Alitalia deal will be completed on July 31st.

Alitalia had to find a partner

When Air France-KLM Group walked away from a rescue deal set up by the government in 2013, Alitalia was compelled to seek a new partner.

The Italian carrier has been losing money for several years and is about to carry out major job cuts as fierce competition from global carriers and low-cost airlines progressively reduce its market share.

An equity partnership with Etihad will give Alitalia the money required to invest in long-haul flights.

It is Etihad’s largest investment ever in a foreign carrier. Bloomberg Businessweek quotes people who asked not to be named who said €400 million will be paid for the 49% stake. According to the Financial Times, however, the deal is worth about €560 million.

The two companies wrote in a joint statement:

“Alitalia and Etihad Airways today confirmed that they have agreed the principal terms and conditions of a proposed transaction whereby Etihad Airways will acquire a 49% percent equity stake in Alitalia.”

“The airlines will now move to finalize the transactional documents, that will include the agreed upon conditions, as soon as possible. The conclusion of the investment is subject to final regulatory approvals.”

European Union regulators are likely to check through the deal with a toothcomb. There is growing concern about non-EU carriers gaining strangleholds on EU airlines by acquiring minority stakes.

The European Commission ordered an inquiry in April into the stakes held by non-EU investors in four EU airlines, including Air Berlin, which is 29.21% owned by Etihad.

A way out for Alitalia’s problems

Alitalia’s Board voted on June 13th to accept Etihad’s bid to invest in the airline. For the Italian carrier, which has debts totaling approximately €880 million ($1.1 billion). The deal is clearly a way out of its precarious fortunes.

In 2013, Alitalia was facing bankruptcy, and in October approved plans for a capital increase of €300 million. It managed to avoid bankruptcy with €200 million in credit lines from its bankers and an injection of €300 million from shareholders.

In fact, during its 68-year history it has rarely made an annual profit, surviving thanks to several state bailouts before being privatized in 2008.

Alitalia described the deal as an excellent outcome which would provide the company with much-needed financial stability. The Abu-Dhabi carrier said the agreed equity partnership will give air travelers coming in and out of Italy more choice.

How much will Etihad spend?

Neither airline disclosed how much Etihad plans to invest on Alitalia. According to Maurizio Lupi, Italy’s Transport Minister, Etihad is set to invest up to €1.25 billion ($1.27 billion) between 2014 and 2018 – €560 million up front and an additional €690 million over the next four years.

Mr. Lupi said in a statement:

“It’s clearer and clearer that this marriage has to be done as it is an important industrial investment. We will meet unions to discuss job cuts.”

The airline was expected to have run out of cash by August. Trade unions are unlikely to make moves against Etihad’s terms. The Italian government says its flagship airline is a strategic business and a national asset.

Etihad Alitalia

The partnership will allow Alitalia to concentrate on long-haul flights.

Etihad’s equity partnerships

Etihad was launched in 2003. It has a history of acquiring minority stakes in airlines across the globe.

Etihad has minority stakes in the following carriers:

  • Darwin Airline: 34%,
  • Air Serbia: 49%,
  • Air Seychelles: 40%,
  • Air Berlin: 29.21%,
  • Jet Airways: 24%,
  • Virgin Australia: 19.9%,
  • Aer Lingus: 4.1%,
  • Alitalia: 49%.

Etihad Chief Executive Officer, James Hogan, said acquiring minority stakes in other airlines has helped his company deliver a wider network of more than 400 destinations. The Etihad Alitalia deal will give the company access to a major economy inside the European Union.

Etihad aims to use equity-stakes and code-shares to increase traffic through Abu Dhabi airport, which is opening a new terminal in 2017.