$1.17 Billion Deal Now Goes To Regulators

Here's the first airline merger announcement of 2008... and it has nothing (well, very little) to do with Delta. On Sunday, the board of beleaguered Italian flag carrier Alitalia accepted a $1.17 billion takeover offer from Air France/KLM.

The French takeover -- described as "hard to digest" in one Italian editorial -- works out to one share in Air France/KLM for every 160 shares in Alitalia... a valuation of .10 euro per share in the Italian airline, or an 80 percent discount from Alitalia's Friday closing stock price. And that's the best they could get for the struggling airline, hit with labor strife and rising costs.

In exchange, Air France/KLM said it plans to inject one billion much-needed euros into Alitalia's operations, reports The New York Times, pending approval by the Italian government and Alitalia's unions. If those groups sign off on the agreement, the merger will go to EU regulators for their consideration by the end of June.

"Alitalia has given a painful yes to the French," wrote the Italian business daily Il Sole-24 Ore wrote in an editorial published Sunday. The news may be "hard to digest," writers added, but admitted the French takeover was "the only concrete solution" for the airline.

Nationalist pride aside, the Italian government is likely to view the news with at least some rejoicing. With a 49.9 stake in Alitalia, the government has injected 4.3 billion euros into the struggling carrier over the past five years, trying to keep the struggling airline in operation. That burden will now be Air France/KLM's to bear.

Facing stiff competition from new domestic rivals like Air One, Alitalia's share of the Italian travel market declined from over 80 percent 10 years ago, to around 30 percent today. The carrier loses an estimated one million euros every day it's in operation, and is about 1.3 billion euros in debt.

"I think that the government has acted to arrive at a positive solution," said Italian labor minister Cesare Damiano, though the government's final decision is pending a review of the deal's impact on employees.

Analyst Dan Solon categorized the deal as "a pragmatic solution," in the face of what's anticipated to be a very hard year for many airlines worldwide.

"If you believe that 2008 is going to be a very bad year economically, then obviously to the extent that they can get through consolidation of the industry quickly, then Air France can present this to the Italians as an alternative to going bust on their own in this environment," said the Barcelona-based analyst.

There is some question whether Italy's fractious government will agree. Alitalia's CEO Maurizio Prato has said often a merger with Air France/KLM was his airline's best option for long-term survival. That view was echoed -- albeit reluctantly -- by Prime Minister Romano Prodi, who signed off on merger plans in December, as ANN reported, after an auction for the carrier failed last summer.

Things have changed since then, however. Prodi's government collapsed in January -- an event not unfamiliar to the European country's history -- and new elections are scheduled for next month. The leading candidate, former PM Silvio Berlusconi, had insisted Alitalia not be sold to a foreign entity... though he has softened his tone somewhat since.

If the deal is approved, Alitalia will keep its Italian identity... but that may be one of the few things salvaged. Air France/KLM plans to radically overhaul the airline's network, basing the bulk of operations at Rome's Leonardo da Vinci Fiumicino Airport, and scaling back operations from Alitalia's secondary hub in Milan -- an airport frequently cited as one of the worst in Europe by travelers. Labor leaders in Northern Italy aren't wild about that plan.

Even if the deal is approved, there's also the question of whether Air France/KLM might not soon live to regret the buyout... as Alitalia may be too deep in the hole to salvage. Stay tuned.

FMI: www.alitalia.com/, www.airfrance.us, www.klm.com