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Can IAG’s bid for Aer Lingus get off the ground?

Aer Lingus
Aiden Crawley | Bloomberg | Getty Images

The battle for control of Irish national carrier Aer Lingus has taken yet another twist, with International Airlines Group(IAG)'s audacious bid for the airline.

The move – which Aer Lingus said Thursday "fundamentally undervalues" the airline – was swiftly rejected but the question remains over whether Willie Walsh, chief executive of BA owner IAG, will come back with a raised bid for the carrier where he spent 26 years of his career.

There are a number of factors which will determine the outcome of this bid. For Aer Lingus, where Christoph Mueller, its chief executive, is about to leave for the difficult task of turning around Malaysia Airlines, it will come down to price – and the rejected IAG initial offer was believed to be close to 2.20 euros ($2.7) per share, valuing the airline at 1.1 billion euros.

With players like Walsh, the Irish government, Ryanair's Michael O'Leary, and telecoms tycoon Denis O'Brien involved, this could be one of the more entertaining bid battles of recent time.

Here are a few reasons why.

Ryanair

The budget airline, led by characterful chief executive O'Leary, has tried to buy Aer Lingus three times now. It is currently appealing against a ruling that it has to reduce its near-30 percent stake in its rival, bought at an average of 2.40 euros per share. O'Leary has said a couple of times that he is open to approaches for the stake. This could be an opportunity for Ryanair to get a reasonable price – or decide to be a stumbling block in the path of a rival bid.

"The strategic rationale for owning Aer Lingus, as an upmarket brand which could do long-haul flights, has now gone away," Stephen Furlong, airlines analyst at Davy Stockbrokers, told CNBC.

A ruling by the U.K.'s Court of Appeal on whether Ryanair has to sell its stake is expected either Friday or in January – which is likely to be one of the reasons Walsh has chosen this week to make his first move.

IAG previously co-operated with Ryanair over one of its Aer Lingus bids, by agreeing to buy some of Aer Lingus's Heathrow slots if the bid had succeeded. If nothing else, this shows that Walsh and O'Leary can co-operate.

Price

The 2.20 euro per share bid price rejected by Aer Lingus was the price at which it floated in 2006. However, the Irish airline has consistently traded at below its IPO price since March 2008. While it is in a good cash position, and is profitable, its margins are lower than IAG's, and Ryanair has seriously dented its performance on short-haul flights. It is also embroiled in a dispute over its pension scheme, which has a 750 million euros deficit, although that appears to be closer to a resolution.

"Any material bid increase is unlikely to be forthcoming without the ability to drive significant revenue and cost synergies," analysts at Nomura wrote in a research note.

There have been plenty of deals minted in the airline industry in recent years, leaving Aer Lingus as one of the few national carriers in Europe not to be merged into a larger group. Shareholders may ultimately think that this is their best bet.


Irish government

Owing to Aer Lingus's previous state ownership, the government still controls around a quarter of its shares, and has said that it will only sell its stake "on terms and at aprice that are acceptable". It has previously given short shrift to Ryanair, and Walsh didn't exactly endear himself to the government during his time in charge at the airline, with then Taoiseach (Prime Minister) Bertie Ahern famously accusing him of wanting to "steal" its assets.

However, there is a new administration now in place, and Ireland, only recently out of a bailout by international lenders, might be glad to cash in its stake.


Competition

The European competition authorities, who previously scuppered Ryanair's bid for Aer Lingus, will be looking closely at this offer. The main area of focus will be Heathrow, where IAG (via British Airways), controls around 51 percent of slots – a level that would potentially rise to around 55 percent (according to Nomura analysts) if it bought Aer Lingus.

As with the acquisition of BMI, IAG would probably have to give up select Aer Lingus slots which are deemed too close to its existing presence at the airport, according to Furlong. The Dublin-Heathrow route is one possibility.

BA already has a smaller share of its hub airport than other European national carriers, such as Lufthansa or Air France, so there should be room to expand its capacity.

- By CNBC's Catherine Boyle