Flybe

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Where next for Flybe’s shareholders?

Shares in Flybe nosedived last Friday after receiving an emergency takeover deal from a consortium of investors led by Virgin Atlantic and Stobart Group. With the agreement valuing the airline at just £2.2m, shareholders are likely to lose vast sums of their cash if it passes.

This week then saw the situation get even worse for investors, who were told they would not get a vote on Flybe’s decision to sell off its main trading arm. The company made this decision after failing to meet the consortium’s original deal terms.

Unfortunately, with Flybe’s financial situation and trading environment looking so bleak, it seems unlikely that there is a better alternative for investors than facing the loss. Without outside support, the firm appears to have indicated that there is a real chance of it going out of business.

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Crunch time

Flybe first commenced a formal sale process in November last year as a way of maximising value for shareholders in the face of ongoing problems for the UK airline industry. These include issues like higher fuel costs, currency headwinds, political uncertainty, and softer customer demand.

Last Friday, it finally received a takeover offer from Connect Airways, a tie-up between Virgin Atlantic, Stobart Group, and investment house Cyrus. As part of its proposal, Connect has committed to making a £20m bridge loan to support Flybe’s ongoing working capital and operational requirements. It also intends to provide up to £80 million of further funding once the deal completes.

Operationally, Connect has proposed the combination of Flybe and Stobart Air into a more integrated commercial operation alongside Virgin Atlantic’s long-haul operations. It called this a ‘compelling proposition’ that will create a comprehensive regional network in the UK, Ireland, and Europe. Meanwhile, Flybe said it would benefit from the presence of a committed strategic investment partner and a more prominent presence at Heathrow and Manchester airports.

Under the terms of the proposed acquisition, Flybe’s investors will receive one penny per share, valuing the company’s entire issued share capital at just c.£2.2m. This was a massive discount to the 16.3p the business had been trading at the day before the deal. Unsurprisingly, this prompted a colossal fall in Flybe’s share price, which dropped by as much as 90pc in early trading before settling at 3.8p.

Regardless, Connect said it made the deal after a careful review of Flybe’s due diligence information, capital needs, and challenging trading environment. Flybe’s directors also unanimously recommended the proposals, providing significant insight into the true scale of the airline’s troubles.

Renegotiation

Since last Friday, things have gone from bad to worse for Flybe’s shareholders. After collapsing another 70.1pc on Monday, shares fell a further 41.8pc on Tuesday following the release of an updated offer. The company was sat at 2.4p a share as at the time of writing.

In Tuesday’s update, Flybe said it had failed to meet the conditions required for the £20m bridge facility. It is understood that the company was unable to persuade the banks that take card payments on its behalf to pass on the much-needed cash.

To get around the issue, Flybe and Connect amended the terms of their deal. As part of this, Connect agreed to buy Flybe’s leading trading company and its digital arm flybe.com for £2.8m. It also renegotiated the terms of the bridge facility, releasing £10m to Flybe immediately. Finally, the two parties said ‘improved agreements’ have been reached with banks to improve liquidity.

Unfortunately for Flybe’s investors, they will not get a vote on the asset grab. Indeed, once the firm transfers to a standard listing on 17 January, shareholders cannot vote on the divestment, which has a long-stop date of 22 February. Nor will the £2.8m earned from the sale improve the terms of the takeover offer – existing investors will still only get a penny for each of their shares.

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Where next?

After a brief rally at the end of 2018 on the back of takeover speculation, the last week continues years of disappointment for Flybe’s shareholders. The company has struggled in the ailing British airline space, a dynamic that has already sent Monarch and Primera Air into administration. To put this into perspective, Flybe had a market cap of around £215m when it listed back in 2010. This figure now sits at just £8.93m.

In Tuesday’s update, the firm said it believes that ‘obtaining this revised facility from the Consortium provides the security that the business needs to continue to trade successfully. This preserves the interests of its stakeholders, customers, employees, partners and pension members.’

Its recommendation may be justified, and claims like this suggest Flybe has little other option than to go along with Connect’s terms if it wishes to stay afloat. However, it is likely unlikely to offer much consolidation to the firm’s shareholders, who are now being forced to choose between suffering a massive loss on their investment or possibly seeing the business they backed go bankrupt.

Business, as usual, says Tim Baker of MHK

The author does not hold shares but was remunerated to write the article

 



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