Air France Offers to Buy Alitalia for EU747 Million

Air France Offers to Buy Alitalia for EU747 Million

March 16 (Bloomberg) --Air France-KLM Group, the world's largest airline by sales, offered to buy Alitalia SpA in a bid valued at 747 million euros ($1.2 billion) as part of the Italian government's plan to save the state-owned carrier from bankruptcy.

Air France-KLM will swap one of its shares for every 160 of Alitalia's, valuing the Italian airline at 139 million euros, or about 10 cents a share, Air France said in an e-mailed statement. That's less than a fifth of Alitalia's closing price March 14. Air France will also buy convertible bonds for 608 million euros. Alitalia's board accepted the bid after meeting for more than 10 hours in Rome yesterday.

In buying Alitalia, Air France-KLM wins access to one of continental Europe's biggest passenger markets, while inheriting an airline that hasn't earned an operating profit in almost a decade and loses more than a million euros a day. Prime Minister Romano Prodi's government has been trying to sell its 49 percent stake in the carrier for more than a year and chose Air France in December to enter into exclusive talks.

``In the short term the purchase may hurt profitability, but Alitalia will bring significant leverage with the opening of new hubs in Italy,'' said Alexandre Hezez of Paris-based Roche-Brune SAS, who helps manage 110 million euros. Hezez spoke in a Bloomberg Television interview before Air France provided details of the offer.

Italian Market

Air France gains access to a market with a population of some 58 million people, comparable to France, with 61 million. It also gets airport bases, or hubs, in Rome and Milan, from which Air France-KLM can tap passenger flows for flights internationally.

``Air France-KLM's offer, conditional on a number of elements, is based on an industrial plan providing for the restructuring and re-launch of Alitalia,'' the Paris-based carrier said.

Alitalia's unions and the government must agree to the offer for the sale to go ahead, Air France said. The collapse of Prodi's administration on Jan. 24 revived opposition from unions and politicians in the country's industrial north to Air France's offer, which supports the plan to shift flights away from Milan's Malpensa airport in favor of Rome.

Italy holds elections next month and the new government will likely have a say in whether the deal can go ahead. Former Prime Minister Silvio Berlusconi, whose political stronghold is in the north, leads in opinion polls. He has said he prefers Alitalia to be sold to Italian investors and has pledged to save Malpensa. He also said he wouldn't rule out the sale to Air France.

Raising Cash

Alitalia can't hold on much longer. The carrier had just 367 million euros in cash and short-term credits at the end of December and its shares have declined by a third this year on concern about possible bankruptcy as the sale process drags on.

As part of an industrial plan to turn the carrier around, Air France will raise 1 billion euros in new funds for Alitalia through a share sale to fund the ``the commercial re-launch of Alitalia,'' Air France said. The Italian government has also agreed to an emergency credit line to help the airline stay in business, the Alitalia said in a statement.

The Rome-based carrier should be able to return to operating profit as early as 2009, Air France said, and will then ``rapidly move'' to operating margin levels in line with those of other big European airlines.

The carrier is already cutting unprofitable flights, including all but three of its 17 intercontinental routes from Malpensa, while increasing traffic at Rome's Fiumicino airport, ending a strategy of two longhaul bases.

Alitalia employs 11,000 people and has a fleet of 140 aircraft. It carried 25 million passengers in 2007. It had sales last year of 4.9 billion euros and has posted more than 3 billion euros in net losses since 2000, with its last operating profit coming a decade ago, in 1998. The group has net debt of about 1.2 billion euros.

Alitalia has been through nine chief executives in the last 10 years as successive chiefs have quit or been pushed out amid disagreements with labor and the government about how to restructure the airline.

BLOOMBERG