By Michael Northcott Monday, 12 November 2012

Aer Lingus withholds dividend to fend off Ryanair

Ryanair's repeated attempts to take over Aer Lingus have prompted bosses to withhold €50m in dividend payouts to cover costs of defending the business.

Michael O’Leary, CEO of Ryanair, has long been known for his aggressive strategy on rival Aer Lingus. The European Commission is currently considering his latest €694m bid for the company. But Aer Lingus has stepped up its efforts to protect the business from O’Leary’s clutches by cancelling the dividend payments of around £40m to cover the costs of fending off the takeover bids. The firm’s chief executive, Christopher Mueller, said ‘the distraction is enormous’, and hinted that the costs were a burden to the business, saying the money could have been used in ‘a thousand better ways’.

The decision is particularly irritating for shareholders because this is the first year they would have received a dividend since the airline was privatised in 2006. Incidentally, 2006 was the first year that Ryanair unsuccessfully attempted a takeover bid. O’Leary has been a thorn in Aer Lingus’ side ever since it was possible to invest in the newly privatised company. ??Of the actual amount of cash needed for legal and advisory fees, Mueller said: ‘By the end of the third bid in January I predict the total amount Aer Lingus will have spent on the three defences will be as much as three dividend payments.’

But Ryanair reckons it is being a most considerate suitor: it has produced an ‘unprecedented’ basket of remedies for the Commission’s concerns, although others are concerned that the 85% route-overlap of the two airlines would give Ryanair a near-monopoly if a deal went through. On the risk of giving Ryanair the deal, Mueller said: ‘Let’s do a reality check. Who on earth would voluntarily enter the market to compete with Ryanair? You need to have a cost position which is at least on the same level in order to compete on price. Ryanair is the cost leader in Europe.’ A very good point – it would be tough to launch against Ryanair – but it is great publicity when your competitor starts trumpeting your low costs in public. Well done Mueller.

Still, the Aer Lingus boss reckons that if any consolidation is to happen in the market, his airline can make some acquisitions by cherry-picking routes instead of swallowing up whole airlines, and therefore avoid continuing to be a target itself. It will find out later this week whether it is allowed to acquire the Heathrow-Manchester routes formerly run by BMI, which were freed up when British Airways acquired the latter.

As for Ryananir, news from the European Commission is not good. The EC remains concerned over competition issues should the merger go ahead. Ryanair has until December 21 to formerly finalise the list of remedies it is prepared to offer to the objections. 

The bottom line is that the EC is in a quandary because, although Michael O'Leary doesn't have many friends in European politics, if the commission rejects this re-submitted takeover bid it would be unprecendented. And O’Leary is unlikely to give up without a fight. 

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