Presentation at Luiss University 1 December 2014 Alitalia – Etihad Transaction Case Study Alitalia (AZ) Summary Overview The Birth of the “New” Alitalia Alitalia – Compagnia Aerea Italiana (“CAI” or the “Company”) is a private company that started its operations in January 2009 The Company currently flies to 103 destinations, of which 26 in Italy and 77 for the rest of the world, 186 routes and more than 4,700 weekly flights. In 2013: – Carried 23 million passengers – Generated €3.4 billion revenues One of the youngest fleets in the world with an average age of 6.5 years Alitalia is a member of the SkyTeam global alliance and, since 2010, forms part with Air France-KLM and Delta Air Lines of the main air transport Transatlantic Joint Venture The Hub The Fleet The Crew Fiumicino Airport Source: Companies press releases and websites, news articles. 1 Alitalia: A Long Story of Difficulties Since 2000 Alitalia has cumulated negative results in excess of ca.€9.0bn, including ca.€3.0bn of liquidation costs related to Alitalia – Linee Aeree Italiane. Alitalia – Linee Aeree Italiane Alitalia – Compagnia Aerea Italiana Net Income Evolution (€m) Net Income Evolution (€m) 93 (69) (168) (168) (256) (280) (327) (512) (495) (569) (626) (844) (907) (1,000)(1) 2000A 2001A 2002A 2003A 2004A 2005A 2006A 2007A 2008E 2009A 2010A 2011A 2012A 2013A Cumulated Net Income (€m) Cumulated Net Income (€m) (256) (327) (494) (1,163) (1,070) (1,582) (563) (843) (2,426) (2,594) (1,411) (3,220) (3,715) (4,715) 2009A 2010A 2011A 2012A 2013A 2000A 2001A 2002A 2003A 2004A 2005A 2006A 2007A 2008E In the period 2000 – 2008E, Alitalia – Linee Aeree Italiane In the period 2009 – 2013, Alitalia – Compagnia Aerea Italiana posted a cumulated net loss of ca.€4.7bn posted a cumulated net loss of ca.€1.4bn According to Italian press news, the estimated liquidation cost amounted to ca.€3.0bn(2) Sources: Alitalia annual reports. Note: (1) As estimated in the report “Alitalia – La privatizzazione infinita”; financial accounts FY2008 not available since on September 2008 Alitalia – Linee Aeree Italiane was declared insolvent and subject to a special bankruptcy procedure termed extraordinary administration (“amministrazione straordinaria”). (2) Average of two Italian press news, namely “Ecco chi ha pagato il conto. Salvataggio da 3,2 miliardi” (Corriere della Sera, 8 August 2013) and 2 “Quanto costa chiudere Alitalia. In totale lo Stato pagherebbe direttamente circa 2,9 miliardi” (lavoce.info, 16 September 2008). Alitalia: History Overview Established as State-owned company, Alitalia grew in the early decades up to face the first difficulties following the deregulations of the sector and the higher competition in the domestic market 2000: Following the 2003-2004: Proposed a 1946: 1957: Malpensa failure to new business plan Incorporation of Alitalia merged 1970-1990: All 2000-2003: become an (Alitalia daily lost €1m). 2007: AF – KLM Alitalia with LAI and airlines except Global drop in air international hub(1), Italian State provided a selected as Aereolinee became Alitalia Alitalia developed traffic. Strategic KLM decided not to €400m bridge financing potential Italiane Linee Aeree industrial plans to refocus on proceed the alliance and disposed a 12.3% candidate to take Internazionali Italiane face the oil crisis domestic hauls with AZ(2) stake(3) over Alitalia 2001: Alitalia entered End of 2006: 1968: Awarded as 7th 1996: Italian state 2003: Business plan 1950: Alitalia SkyTeam, joining Air airline globally and 3rd disposed 21% proposal for Government failure in acquired Lati and France, Delta Air in Europe, and stake to employees recapitalization and selling a 39.9% stake in started serving also Lines, Korean Air, became the first and listed a 15% disposal of the stake Alitalia, with all the 11 LatAm (4) Aeromexico and CSA European airline to stake held by the Government potential buyers Czech Airlines have an all-jet fleet withdrawing their bids 1946 – 1970 1970 – 1990 1990 – 2000 2000 – 2006 2007 Second and third Deregulation / Attempts to relaunch the business through several Early stage growth First privatisation privatisation attempts Oil Crisis industrial plans (failed) Source: Companies press releases and websites, news articles. Notes: (1) Scarcity of connections (rails sand highways) to the city of Milan and other main cities located in the Northern part of Italy. (2) Namely Fiumicino, Linate, Malpensa. (3) Italian State remained with a 49.7% stake. (4) Italian State remained with a 64% stake. 3 Alitalia: Recent Developments Over the 2008–2013 period, the new Alitalia lived a tough economical situation due to both internal and external factors AF-KLM’s offer was rejected due to the lack of agreement with unions/government on 1.6k layoffs Jul-13: Dec-13: Dec-09: Mar-12: Feb-13: Presentation Poste invested May-08: Dec-08: Codeshare Andrea Ragnetti Resignation of the €75m in AF-KLM CAI bought key agreement appointed of the CEO Industrial Plan a €300m CEO replacing proposed assets of AZ between Alitalia Andrea Ragnetti 2013–2016 capital increase merger with AZ for €1bn and Etihad Rocco Sabelli Nov-13: Aug-08: Jan-09: Jan-12: Feb-13: Apr-13: Approval of Creation of AF-KLM bought Negotiations Convertible Gabriele the Industrial CAI, investor a 25% stake in with Blue bond issuance Del Torchio Plan revision consortium led new AZ for Panorama and for €150m appointed CEO by R. Colaninno €0.3bn Wind Jet Both transactions failed in 2H12 Source: Companies press releases and websites, news articles. 4 Alitalia Key Figures From 2009 to 2013 Alitalia reported losses that made the Net Equity shrink and the Net Debt increase to more than €900m. These negative results have been driven by lower traffic and high rents. Revenues (€m) Net Equity (€m) Growing top line – +5% CAGR Cumulated capital erosion 723 3,478 3,594 548 3,225 3,406 479 2,827 201 (27) 2009A 2010A 2011A 2012A 2013A 2009A 2010A 2011A 2012A 2013A EBITDAR (€m) and EBITDAR Margin (%) Net Debt (€m) and Net Debt / EBITDA (x) Declining marginality Debt expansion 448 1,029 398 936 334 847 839 854 244 9.5x 13% 114 10% 11% 6.7x 7% (1) (1) 4% n.m. 3.8x n.m. 2009A 2010A 2011A 2012A 2013A 2009A 2010A 2011A 2012A 2013A Net Income (€m) Passengers (m) and Market Share (%) Negative return Volatile PAX carried 23.9% 23.8% 23.6% 22.6% (69) 21.7% (168) (280) 24.6 (327) 23.4 23.8 22.7 21.8 (569) 2009A 2010A 2011A 2012A 2013A 2009A 2010A 2011A 2012A 2013A Sources: Alitalia annual reports. Note: (1) 2009A and 2013A EBITDA equals to (€54m) and (€138m), respectively. 5 Etihad (EY) Summary Overview The Birth of the “New” Alitalia Etihad Airways began its operations in 2003 From its Abu Dhabi hub Etihad flies to ca. 110 passenger and cargo destinations in the Middle East, Africa, Europe, Asia, Australia and the Americas. In 2013: – Carried 11.5 million passengers – Generated ca. €4.6 billion revenues The airline has a fleet of 102 Airbus and Boeing aircraft, and more than 210 aircraft on firm order Holds equity investments in a number of European and Asian Airlines The Hub The Fleet The Crew Abu Dhabi International Airport Source: Companies press releases and websites, news articles. 6 Snapshot on Alitalia and Etihad: Side by Side done Despite a smaller workforce and fleet, Etihad has been able to achieve ca.€4.6bn revenue covering more destination than Alitalia. FLEET FLEET 137 102 Fleet Age Average 86 6.5 Fleet Age Average 28 Mid-range years 4.9 Mid-range years 22 64 Long-range Long-range REVENUES REVENUES 4,573 € million 20 3,406 10 Regional € million Cargo airplanes 9 206 aircraft Air One to be Smart Carrier delivered EMPLOYEES EMPLOYEES by 2015 (of which 52% 14,000 7,900 long-range DESTINATIONS DESTINATIONS and 47% 103 96 mid-range) Sources: 2013 annual reports, Companies press releases and websites, news articles. 7 Etihad: the Right Partner 40% stake 49% stake 10.5% stake 24% stake 3% stake Minority Stake Acquisition Complementarity with AZ Proven M&A Track Record Selected Recent Awards Airline Market Leadership ‘14 M. East’s Leading Airline ‘14 Best Economy Class ‘14 World’s Leading Airline ‘13 Airline of the Year ’13 World Leading First Class ‘13 Solid and Supportive Shareholders Expected High Growth 1st Class Service Provider Sources: Companies press releases and websites, news articles. 8 Key Stakeholders done Lending Banks Customers Largest Shareholders European Airlines Suppliers Public Stakeholders and Unions Sources: News articles. 9 Transaction Overview done On 8 August 2014, Etihad acquired a 49% stake in Alitalia. The transaction also envisaged a capital commitment by existing and new shareholders, debt restructuring and new financing, resulting in a ca. €1.8 billion total transaction value. Heathrow Slots The Process in Pics €60m The total announced Equity €1,758m investment amounts to ca. €300m Purchase 75% €1.8bn and comprises the €388m AZ Loyalty following: €598m €113m – Etihad’s investment of €560m through a Negotiation with Unions combination of equity €300m injections, asset €75m purchases and other 1,458 €560m €225m funding arrangements 860 – Existing and new core 785 560 560 shareholders contribution with a capital increase of up to Etihad Equity Quasi- Capital Debt New Transaction Press Conference €300m (€225m in Investment equity Increase Restructuring Loan Value equity and €75m in quasi-equity) – Current lending institutions restructured Parties Involved up to €598m and also New Partner Shareholders Lending Banks committed to provide new loan facilities for % of Total Transaction Value Signing