TheChek News Flow

Norwegian Air Shuttle [OSL:NAS], the low-cost airline that recently rejected two takeover proposals from rival and British Airways owner IAG Group [LON:IAG], could be a viable takeout candidate for low-cost airlines easyJet [LON:EZJ] and Ryanair [LON:RYA], according to three sector advisors.

The companies’ less powerful unions and lack of long-haul routes could make them a better strategic fit, the first and second advisors said.

On 12 April, IAG announced that it had acquired a 4.61% stake in Norwegian and was considering making an offer to buy all of the airline. On 26 April, Norwegian announced that it had received interest from several suitors, which it did not disclose, and had hired advisors, also undisclosed.

Ultra-low cost carriers like Ryanair and easyJet are less union-dominated than larger peers AirFrance-KLM [EPA:AF] and Lufthansa [ETR:LHA], said the first advisor, who added that British Airways itself has a huge union.

He cautioned, however, that a deal of this magnitude would be a “pretty big slug” for GBP 6.63bn market cap (14 May) easyJet. As of 30 September 2017, easyJet’s net adjusted debt stood at GBP 413m.

Ryanair and easyJet are nonetheless logical suitors because neither airline offers long-haul, trans-Atlantic flights, and would therefore face fewer competition issues than IAG, both advisors said.

The buyer will most likely be a European airline given government rules about foreign ownership of airlines, the first advisor noted. Any other bidder would have to own a minority stake in Norwegian, which has not been a successful model for airlines such as Etihad Etisalat, the United Arab Emirates’ national airline, he added. In 2014, Etihad invested USD 1.92bn in Italy-based Alitalia, taking a 49% position, but it has notably failed to resolve union issues or sway Alitalia’s staff to restructure the company.

Both advisors mentioned the rough financial situation for Norwegian, with the first noting that Norwegian’s high leverage could cause trepidation for suitors. The second noted that, in order to compete with more established European carriers, Norwegian had to cut the cost of its tickets, hence its net debt is substantially higher than that of its peers.

Norwegian reported net debt of NOK 22bn (USD 2.75bn) last year. The borrowing has funded Norwegian’s massive ramping up of aircrafts, and its portfolio is expected to climb to 190 planes by the end of 2019, according to news reports.

One way around this trepidation would be for IAG—or other large suitors—to buy a minority stake in the airline, said the advisor, though he raised the same concerns about the risks of minority ownership.

A strategic suitor could offer a significant premium to the 12x to 13x EBITDA private equity has paid for ultra-low cost carriers in the in the past, the first advisor projected. Norwegian reported year-end EBITDAR of NOK 3.95bn (USD 494m), down from NOK 5.958bn (USD 745.4m) a year earlier. Norwegian Chief Executive Bjorn Kjos noted that 2017 was a year of “global expansion driven by new routes, high load factors and continued fleet renewal.”

Norwegian officially announced its rejection of IAG’s two takeover proposals on 4 May, saying they undervalued the airline; no prices were revealed. Following the announcement, shares of IAG rose 5.6% while Norwegian shares fell 8.9%.

While a takeover by IAG would strengthen Norwegian’s long-haul routes and competitive position, the deal could face competition hurdles, said the second advisor. EC’s transport chief Henrik Hololei recently stated that IAG, as well as other major European airlines, should not gain any more market share at this time.

Norwegian’s potential ‘maverick’ status could complicate an EC review of its intended acquisition by IAG, as previously reported. Norwegian began offering low-cost long-haul flights in 2014, providing a transatlantic service for as low as EUR 113 per single flight. As a pioneer in intercontinental low cost long haul flights, Norwegian could be seen as a maverick, proving to be a “clear threat” to the more established operators, as reported.

A Reuters report on 12 April noted that easyJet and Ryanair are focused, for the time being, on short-haul European flights, while AirFrance-KLM is dealing with a major pilot strike. The CEO of the latter company resigned earlier this week as the strike intensified. Lufthansa, while a known consolidator, was said in the report to have less synergies with Norwegian than IAG.

In March, Norwegian raised NOK 1.3bn (USD 162.6m) in a private placement. Arctic Securities, Carnegie, Danske Bank and Pareto Securities acted as joint lead managers for the transaction.

Norwegian declined to comment. Ryanair and EasyJet did not return requests for comment.