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Lufthansa Nears Rescue, Making Germany Its Top Shareholder

William Wilkes, Arne Delfs and Eyk Henning
Lufthansa Nears Rescue, Making Germany Its Top Shareholder

(Bloomberg) -- Deutsche Lufthansa AG is close to a multibillion euro bailout deal that would see the state become its biggest shareholder after the coronavirus punctured a decades-long boom in air travel.

The shares gained as much as 8.3% Thursday after Europe’s largest carrier confirmed it’s in advanced talks with Germany’s WSF Economic Stabilization Fund for as much as 9 billion euros ($9.9 billion) in aid. The package would include a 3 billion-euro loan, a so-called silent participation and a 20% direct stake through the sale of new shares, Lufthansa said.

The government would also receive a convertible bond equivalent to 5% plus one share. Under German law, the 25% plus one share total stake would enable the state to block motions at annual general meetings, giving it a veto over hostile takeover attempts.

“A decision can be expected shortly,” German Chancellor Angela Merkel said late Wednesday in Berlin, adding that “intensive talks” were ongoing with the company and the European Commission, which would need to approve a deal.

If agreed, the compromise deal would bring the curtain down on weeks of tense negotiations between the company and state officials. At issue was the question of how involved the state should be in the affairs of a company that’s long been a symbol of German industrial might and its identity as exporter to the world. Like other airlines across the globe, Lufthansa has been battered by a near-halt to air travel that’s ruined the finances of previously healthy carriers and forced them to seek state bailouts.

Under the plan, Germany would also receive two seats on Lufthansa’s supervisory board. The company didn’t say whether these would be political or independent figures, a matter under discussion in negotiations.

The seats should be occupied by experts who won’t influence business decisions, said Carsten Linnemann, a legislator in Merkel’s CDU-led conservative caucus group. “The goal is an early exit of the state, so that Lufthansa will be able to stand on its own feet again.”

Lufthansa advanced 5.6% to 8.36 euros as of 1:43 p.m. Thursday in Frankfurt. The stock has lost about half its value this year.

EU Decision

An accord could be completed rapidly once the European Commission grants its approval.

The commission declined to comment Thursday on specific cases. It said in an email that it’s aware of the difficulties in the aviation sector and European Union state-aid rules “enable member states to support companies affected by the outbreak.”

It would also set the scene for a dramatic extraordinary general meeting at which shareholders would vote on whether to accept a package that would dilute their own stakes.

Lufthansa would issue the shares to the government for the nominal price of 2.56 euros, a steep discount that would allow the state to profit from any upside to the price. The parties are also discussing a capital-cut option that would see Lufthansa issue shares below that price, the statement said.

Lufthansa units in Switzerland, Austria and Belgium, stand to receive some 2 billion euros in additional funds from those countries. The Swiss deal totaling 1.28 billion francs ($1.3 billion) is in place, while the Austrian and Belgian ageements are likely to follow Germany’s.

Grand Compromise

Final details of the German deal are still being worked out, according to a government spokeswoman.

The contours of a deal come after the airline warned in a letter that cash reserves continued to shrink while it negotiates the rescue package. Lufthansa’s board said it hoped the government would find the “political will” for a deal that would keep the carrier competitive against international airlines.

The German government and Lufthansa have been locked in intense negotiations for weeks over the rescue plan. While the Economy Ministry and Finance Ministry internally agreed on taking a stake of 25% plus one share, the company had opposed the move, people familiar with the matter said earlier.

Lufthansa executives had raised concerns that the terms on offer would hamstring it against international competitors who’ve received less stringent bailout conditions, a point the management board repeated in the letter to employees.

Christian Democrats had also voiced concern that the running of Lufthansa risks becoming politicized. The party is trying to prevent Ulrich Nussbaum, the deputy to Economy Minister Peter Altmaier, from taking one of the board seats. They feel Nussbaum betrayed his boss by forcing his own agenda in the talks.

“The two seats in the supervisory board must now be occupied by experts, who will aim for the economic recovery of Lufthansa and who won’t follow a political agenda,” CDU legislator Linnemann said.

Lufthansa is burning through 800 million euros each month after the coronavirus grounded most of its fleet. Chief Executive Officer Carsten Spohr said on May 5 that the company had about 4 billion euros in cash remaining.

(Updates with legislator, European Commission comment from seventh paragraph)

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