The risky decision by Grupo Espirito Santo (GES) to seek a stockmarket listing for Portugalia rather than merge it with flag carrier TAP Air Portugal took the market by surprise at the end of July.

GES controls 80 per cent of the airline, valued at Esc16 billion ($88.18 million). TAP will now pursue its own privatisation which is expected to involve the sale of up to 39 per cent of the company. Swissair is expected to take a 20 per cent stake with GES also buying into the airline. Employees will receive 10 per cent.

'This leaves Portugalia very exposed,' says one market analyst. 'It has no real critical mass and is operating on the outskirts of Europe.'

It is easy to see why a flotation looks attractive to Portugalia. The Lisbon stock market has had an incredible run so far this year, boosted by the government's privatisation programme and by Expo '98. And TAP is certainly not the most attractive merger prospect in the market. But the timetable of the sale, which is expected to take place in November, looks ambitious and risky unless Portugalia can broker an alliance with a major European carrier. The carrier has confirmed that it is already in talks with a number of alliances.

Portugalia's commercial director, Francisco Bordalo, has confirmed that merger talks with TAP are now off but has made no indication of the size or nature of the planned sell-off.

Meanwhile, TAP was valued at Esc100 billion at the end of July, a figure seen by some as excessive. The airline has failed to meet profit targets and was the second-largest beneficiary of government aid in Portugal, receiving Esc47.7 billion last year.

Source: Airline Business