Lufthansa settlement halved price for BMI: Gemkow

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Germany's Lufthansa claims its out-of-court settlement with the majority shareholder of UK carrier BMI effectively halved the price it had been set to pay to acquire control of the airline.

Lufthansa is managing a UK-based vehicle which will acquire a 50%-plus-one-share stake in BMI, from chairman Sir Michael Bishop's investment company BBW, for £48 million ($79 million).

It will also pay £175 million to cancel a share option agreement which originally dictated the acquisition, and which lay at the heart of BBW's attempt, through legal action, to force Lufthansa to purchase the stake.

Lufthansa chief financial officer Stephan Gemkow, speaking during an investor presentation on 25 June, said the German airline negotiated the settlement having been unsure about defending its case through London's High Court.

"We were prepared, from the contractual situation, to pay by-and-large about twice what we have to pay now," he says. "Because the way we structured the deal, there are some significant tax advantages in it and some other advantages."

Once Lufthansa has BBW's shares in BMI it will control 80% of the UK carrier.

Gemkow says: "At the end of the day, the question was: do we pursue a legal dispute in the UK - I'd very mixed feelings about that, because I've seen very strange decisions there - and risk paying the full price, or have the chance to pay nothing?

"Our lawyers told us the chance was 50:50 and that if we came out of a negotiation path with a price which was about 50% of what we otherwise would have paid, then I didn't have to take the legal risk."

Gemkow says BMI is "still a difficult company" into which Lufthansa will "have to put a lot of brains" to turn it around, but adds: "Now we have clarity, now we know we can start."

He adds that, while BMI is loss-making, there are positive aspects which will help its position - such as its having no hedges and its abandonment of long-haul routes from Manchester which had "burned cash". BMI was "suffering significantly last year", says Gemkow, but "much less so this year".

Lufthansa chief executive Wolfgang Mayrhuber says the German carrier will restructure BMI, but it needs to determine "from what end" the losses come.

"We're convinced we can make money on London," he says. "But you won't make money if you fly an Embraer ERJ-145 out of London to a destination in [the UK], if you pay the landing fee of a 747."

He says the regional operations are an "attractive business" in the UK and that Lufthansa will look at "how we can enhance" the activity, although he adds that it will also ask whether it needs low-cost carrier BMIbaby.

"We need to open the books and get more detail," says Mayrhuber. "We don't want to guess. We need to have facts and figures on the table."