Germany will take Lufthansa stake in landmark US$9.8B bailout

Germany will offer Deutsche Lufthansa AG a 9 billion-euro (US$9.8 billion) bailout that thrusts the state back into the heart of a company privatized with fanfare two decades ago.

The aid package involves taking an initial 20 per cent stake that could rise to 25 per cent plus one share in the event of a hostile takeover, according to a statement on Monday. The plan, which requires European Union approval and will almost certainly be challenged by rival airlines such as Ryanair Holdings Plc, gives German officials an effective veto over company strategy.

While Lufthansa’s management board accepted the offer, the company’s supervisory board will debate and vote on the package before asking shareholders to do the same at an extraordinary general meeting. Europe’s largest airline last week warned that it required “urgent” assistance after the fallout from the coronavirus grounded most of its fleet.

The package represents the biggest corporate rescue in Germany during the pandemic crisis. It’s also the only one that involves a direct investment by Chancellor Angela Merkel’s government, but more may be coming. The government set up the 100 billion-euro fund to buy stakes in stricken companies as part of its effort to stabilize Europe’s largest economy.

Discount Price

Like airlines the world over, Lufthansa is fighting for survival as restrictions to contain the disease punctures a decades-long aviation boom. The company plans to operate fewer aircraft when flights resume and is closing discount arm Germanwings to resize for what it warns could be years of depressed demand.

As part of the deal, the government will pay about 300 million euros for new Lufthansa stock at the discount price of 2.56 euros, the nominal value of its shares on the balance sheet. Lufthansa shares, which have nearly halved this year, closed at 8.50 euros in Frankfurt trading.

The deal also includes a 5.7 billion-euro investment via a so-called silent participation -- a debt-equity hybrid instrument that wouldn’t dilute shareholder voting rights. The company will pay a guaranteed dividend on the investment of 4 per cent in 2020 and 2021, rising to 9.5 per cent in 2027. A portion of the silent participation can be turned into 5 per cent of Lufthansa’s stock if the company doesn’t pay the guaranteed dividend, according to the statement.

The state will also back a three-year loan of 3 billion euros.

Merkel’s government has been eager to avoid losses suffered on bank bailouts after the 2008 financial rout, while safeguarding links to far-flung markets on which the export-led economy depends.

Lufthansa had already secured aid from Switzerland for its unit there in the form of credit guarantees worth 1.28 billion Swiss francs (US$1.3 billion) and is negotiating separate packages for divisions in Austria and Belgium.