German Government To Take 20% Stake In Lufthansa

Filed Under: Lufthansa

Update: The Lufthansa Group Supervisory Board didn’t initially approve this package, but ended up coming to an agreement with the EU Commission

After much back and forth, it looks like Lufthansa and the German government have finally agreed to the terms of a bailout.

The basics of Lufthansa’s rescue package

A package worth of up to €9 billion EUR in grants and loans has been approved for Lufthansa Group by the Economic Stabilization Fund of Germany. Here’s how this deal is structured:

  • The airline will receive up to €3 billion in credit facilities with the participation of private banks, for a term of three years
  • The government will spend up to €6 billion for equity in the airline:
    • The airline will get about a €300 million cash contribution to start acquiring shares
    • The government will acquire €5.7 billion in shares, €4.7 billion of which is classified as equity; this comes with a guaranteed yield of 4% in 2020 and 2021, all the way up to 9.5% in 2027 (obviously this gets costly over time)

The stabilization package still requires the final approval of the management board and the supervisory board of the company, as well as requiring approval of the European Commission and any competition-related conditions.

Lufthansa has secured a sizable rescue package

The German government will own 20% of Lufthansa

Lufthansa was heavily opposed to the government interfering in the airline. The airline basically wanted money from the government, but didn’t want to give up anything for it.

It seems like the airline and government were able to meet in the middle, where the government will take a (mostly) silent stake in the airline.

With this investment:

  • The Economic Stabilization Fund will increase capital by building up to a 20% stake in Lufthansa Group, at the rate of 2.56 EUR per share
  • Subject to the full repayment of the loans and a minimum sale price of 2.56 EUR per share plus an annual interest of 12%, the Economic Stabilization Fund plans to sell its shareholding in full at the market price by December 31, 2023
  • The Economic Stabilization Fund may increase its stake to 25% plus one share in the event of a takeover of the company
  • Two seats on the supervisory board will be filled by the German government, one of which is to become a member of the audit committee
  • The airline is prevented from making future dividend payments, and there are restrictions on management compensation, though the full details of that haven’t been revealed yet

The German government will have a 20% stake in Lufthansa

Bottom line

Lufthansa and the government were able to come to an agreement over state aid. Germany will take a 20% stake in the airline, and will mostly be a silent investor, so Lufthansa doesn’t have to worry too much about government interference.

Furthermore, the government’s stake may be sold by 2023, pending repayment of loans and a minimum share price.

What do you make of the German government’s package for Lufthansa?

Comments
  1. Before everybody complains about supposedly free money for Lufthansa: the deal is not too good from their perspective.

    It is worth noting that the german government pays 2,56€ per stock (which is lower than the current price of 9,218€) -> the share is diluted. Lufthansa has to pay interest for the loan of 4% in 2020 and 2021 and after that that the interest will raise to 9,5% until 2027. The german government can convert bonds to own 25% if Lufthansa does not pay, if the stock is further diluted or if another company wants to take over Lufthansa.

    Important: Current main shareholders Mr. Thiele, Blackrock and Lansdowne will lose power and the stock looses value. The members of the board will receive a basic salary of 80% and are not allowed to receive any bonus payments (!). Lufthansa will have to continue to invest in a modern airbus fleet.

  2. From what I see, Germain governments get what they want. Two seats in the supervisory board were unthinkable for Lufthansa to give up under normal circumstances, but apparently we are anywhere but normality. Hopefully this intervention will stop LH from its notoriously monopolistic expansion.

  3. Guaranteed yield seems to indicate this is preferred stock and may not carry voting rights. But given that the holder is the government, they don’t really need voting rights to get things done.

  4. This is how to do a bailout. Take equity, dilute the existing stockholders and give taxpayers the upside when it comes.

  5. Not a bad deal for everyone face it Germany’s image would have taken a real hit if Lufthansa filed. Now the question will be Virgin Atlantic.

    Has anyone noticed that Callahan of BA has been real quiet of late?

  6. Good, this is how things should be. Want money? Give up equity or pay a huge premium on loans to account for the risk. Or do what the Japanese do, and try to prop up the entire industry rather than giving bailouts.

    Funny how the country who screams “capitalism” the loudest is the one who keeps giving bailouts.

  7. Carsten Spohr has stolen 2 Billion refunds from his clients. One of the biggest robberies in modern history. Instead of put him to jail German government gives him another 9 Billion.

  8. Significant equity for the taxpayers is what SHOULD have happened in the USA but didn’t. We just gave money away to investors who need it least.

    In almost every way, Europe has handled the coronavirus better than our federal government has, so far.

  9. When the banks were bailed out by governments, as a penalty the EU forced them to divest of assets (RBS was made to sell Citizens Bank, WorldPay, Direct Line insurance etc). Similar happened in Japan when JAL was bailed out and had to divest most of its international business. Why is the EU not demanding Lufthansa sells Swiss, Austrian and/or Brussels Air?

    Tonight Ryanair has filed a complaint with the EU about German state aid to ensure that competition in Germany happens. There has been a mention of the EU requiring Lufthansa divest daily slots the equivalent of using 3 aircraft at Frankfurt. Hardly seems a penalty when Lufthansa has 600 aircraft slots.

  10. Good deal for government . Keeps Lufthansa flying and motivated . Bad deal for existing shareholders but better than bankruptcy . Covid 19 has severely damaged so many businesses, none of us could have imagined this just 6 months ago .

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