Italy's last-ditch effort to find a private buyer for its struggling flag carrier Alitalia was dealt a major blow late Tuesday when the only remaining trade bidder pulled out of the auction one week before the deadline.
AP Holding, which controls Italy's low-cost airline Air One, said in a statement that it couldn't meet the conditions of the Italian government. Despite the blow, the Italian Treasury on Wednesday insisted that it's pressing on with the auction, with one bidder still in the running from the original 11. But the government conceded it may have to consider alternatives. US fund Matlin Patterson Global Advisors LLC is still officially in the running and has been sent a copy of a contract it would have to sign were it to make a binding bid by next Monday, the Treasury said. A 24-hour strike by the airline's flight attendants on Wednesday only served to alarm investors further, underlining the myriad labor conflicts on the horizon for a potential new owner. Shares of Alitalia were last down 5% in Milan midday trading.
Failure to find a buyer for Alitalia would be a big setback for Romano Prodi's government, which put the 49.9% state-owned airline on the block seven months ago in an attempt to stop the flood of red ink. Alitalia has reported losses for 17 consecutive quarters. Its net loss in 2006 widened to €628 million from €168 million in 2005. “The current situation is a bit of an embarrassment for the Italian government,” said Tim Coombs, managing director of UK-based consultancy Aviation Economics. “Ideally at this stage in the auction, you'd want to have three to four strong bidders.” Although the privatization initially attracted a flurry of interest from parties including Russia's Aeroflot and private equity fund TPG, the bidders gradually dropped out of the race, citing Rome's restrictive sale conditions and the lack of information about the financial state of the company. “The conditions presented in the contract do not allow ... the development of a strong entrepreneurial project to revive and re-launch Alitalia,” Air One said in a statement.
The government extended the deadline for the auction several times but has so far failed to woo new bidders. In an ominous sign early on, Alitalia's long-term commercial partner Air France-KLM snubbed the auction, saying it would only consider bidding for the company if it turned its business around. On Tuesday Italian newspaper La Stampa reported citing unnamed sources that Air France was interested, but a bid has yet to materialize. Air One was viewed by many as the last credible bidder for Alitalia. Citigroup earlier this month said Italy's No.2 airline could be a good match, citing its order book for 40 A320s, which would have helped replace Alitalia's 17-year old fleet. Alitalia would also have offered Air One a route to a stock-market listing, they said. Finally it would have kept Alitalia in Italian hands, a key consideration for the government. But analysts had also warned that the integration of the two companies could prove very difficult because of the history of poor labor relations at Alitalia, demonstrated yet again by Wednesday's strike.
Penelope Butcher, an airline analyst at Morgan Stanley, said the fate of Alitalia now rests firmly in the government's hands. She noted that while there is potential for Alitalia to be a profitable business it would involve the sort of restructuring the government doesn't seem ready to allow. “If you could cut the work force in half and refocus the network on Milan rather than Rome, yes it could work. But there doesn't seem to be that kind of flexibility,” she said. Aeroflot has said that it could consider bidding for the airline if the conditions were changed.
Aviation Economics' Coombs said Alitalia still has a few selling points. “Italy is one of Europe's largest markets. There's a traffic base there that needs to be served. It's a question of right-sizing Alitalia and making it cost efficient,” he said. He noted, however, that the government is in a difficult situation, unable to inject money into the airline but also loath to sell it to a foreign private equity firm and risk massive layoffs. “Maximizing proceeds is surely not the priority at this point,” he said. (marketwatch.com)