The corona pandemic has brought many companies to the brink of bankruptcy. Some can and should be saved by the government.
Lufthansa, the 94 years old Germany airline, just made a deal with the German government that shows how this should be done.
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Yesterday the shareholders of Lufthansa voted to accept the government bailout:
Lufthansa (LHAG.DE) shareholders on Thursday backed a 9 billion euro ($10 billion) government bailout, securing the future of Germany’s flagship airline after it was brought to the brink of collapse by the COVID-19 pandemic.
The plan, backed by 98% of the shareholder capital that cast a vote at the online meeting, will see Berlin take a 20% stake in Lufthansa and two board seats.
Shares in the company, which employs around 138,000 people, closed 7.1% higher, having risen strongly earlier after top shareholder Heinz Hermann Thiele dropped objections to the deal.
Also on Thursday, European Union regulators approved Lufthansa’s 6 billion euro recapitalisation, part of the bailout deal, subject to a ban on dividends, share buybacks and some acquisitions until state support is repaid.
The deal structuring is interesting and quite favorable for the government.
The government bought newly issued Lufthansa shares for a total of $300 million which will give it 20% of the ownership of the company. These shares were valued at a quarter of their current value. The government will additionally provide €5.7 billion in ‘silent capital’. That is a loan structured as a form of preferred shares that are entitled to a preferred dividend. This will have to be paid back before other shareholders will again get dividends. Lufthansa has a right to pay back the silent capital. But the 20% of the ownership via shares will stay with the government until it decides to sell it.
An additional 3 billion euro credit line is provided by a government owned bank.
This is a much better deal for the taxpayer than in the U.S. where the airlines which were bailed out only had to provide stock warrants which allow the government to buy some shares if it chooses to.
The Lufthansa deal prevents the bankruptcy of the company and a potentially unfriendly foreign takeover. Lufthansa was quite profitable before the onset of the coronavirus crisis. It is a good airline and it is now likely to survive. In a few years it will again make profits.
Seeking Alpha has more technical details of the deal and says that the current Lufthansa share price is too high:
Currently, the share price is about €10.4, which corresponds to a very generous valuation of about 4 times estimated book value. It is also way higher than the €2.56 per share the German government paid. This discount of more than 75% suggests shares of Deutsche Lufthansa are way overvalued.
The share price may currently be overvalued and may well sink. But without the bailout deal the shares would have been worthless.
There is also a deal that will keep most of Lufthansa’s employees in their jobs:
[T]ough decisions lie ahead, with Lufthansa working on a restructuring plan in which up to 22,000 jobs could be at risk – although CEO Carsten Spohr told Bild newspaper that hours and wages could be reduced by a fifth instead of axing a fifth of jobs.
This sounds like a company wide introduction of a four day work week though with only 80% of the former full pay.
The cabin crew union has already agreed to such a deal and the pilot and ground worker unions will likely also do so. There currently ain’t many airline jobs available elsewhere so for most of the employees this is a better deal than a potential long term unemployment.
I really like how this has turned out. A good company has been saved. The government has set the right conditions and it may even profit from the deal. The shareholders have taken a large haircut but will not lose all of their money. The employees will keep their jobs but with a reduced time and pay.
It would have been better if all this had not been necessary. But in the current situation it is the best that can be done.
All parties have taken a “we are all in the same boat” attitude to make this happen.
This should be an example for those bailout deals that will still have to be made.