Airlines has also been a member of the Star Alliance, while offering joint services for consumers, they have also been cooperating closely as partners within the framework of the initially granted Anti Trust Immunity. In view of the present circumstances in regards to the financial state of Austrian Airlines and the close relationship between the two airlines, this report will evaluate the key issues regarding Deutsche Lufthansa AG? s intention to acquire Austrian Airlines. Issue 1: Business overview on the advantages for Lufthansa

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On a functional level, the integration of the sales and service network between the Deutsche Lufthansa AG and Austrian Airlines AG would mean that functional operations could be centralized to cut costs, which is beneficial for both parties involved. In essence, Lufthansa and Austrian Airlines could focus on retaining those aspects of their operational strengths while the most inefficient aspects could be cut. The merger presents Deutsche Lufthansa AG with the opportunity to take advantage of economies of scale.

In an official statement, you as the Chairman of the Executive Board and CEO of Lufthansa, emphasised the benefits for both airlines and the location: “Europe needs a strong aviation sector. Only by combining our powers can we hope to find an answer to the global challenges currently facing our industry. For European business and Europeans as a whole, it is vitally important that we create an airline alliance consisting of profitably operating airlines. This is the only way we can hope to provide an infrastructure that meets the demands of customers.

The consolidation of Lufthansa and Austrian Airlines is another step along this path. It enables us to strengthen our joint competitive position, and makes us the strongest carrier in Europe. Austrian Airlines will be in a position to benefit from the economies of scale, market presence and competitive strength of Lufthansa – whilst at the same time maintaining extensive autonomy in key areas. Integration into our multi-hub system strengthens the product of Austrian Airlines, and can also offer Vienna International Airport good opportunities [.. ” (Lufthansa, 2008). |3 Final Paper: Lufthansa Austrian Airlines

Takeover It was recorded that Austrian Airlines transported a total of 10. 7 million passengers in 2008, with its fleet of 99 aircrafts. Still, it is estimated that Austrian Airlines run at a loss of approximately EUR 166. 6 million in the first half of 2009 which added to the significant amount of debt it has already incurred. This and many other factors make it evident that in the long term, Austrian Airlines would certainly need a merger to still be part of the

European airline industry, which will be materialised through Deutsche Lufthansa, if the merger is successful. From a strategic point of view, Austrian Airlines? “Focus East” strategy, with the special focal point being Central and Eastern Europe, as well as the Middle East and Asia, was one of the main drivers for the company? s initial acquisition offer. During this negotiation phase, Austrian Airlines has accounted for most flights in Central and Eastern Europe. After acquiring these routes, Lufthansa will be set to become Europe’s number one airline, even surpassing Air France-KLM.

Austrian Airlines? Vienna hub adds value to Deutsche Lufthansa AG? s customers and the Austrian Airlines network of flights. As a result a market-oriented multi-hub-network will be created as an important location in the centre of Europe. The merger will give way for Lufthansa to gain access to geographical reach over areas where in the past its scope was limited, while at the same time, increasing dominance in the European airline industry. As in the case of Deutsche Lufthansa AG and Austrian Airlines, a rationale for merging is the expansion of capabilities to meet its competencies.

In the airline industry, one of the core capabilities for a firm is its range of destinations for consumers. By acquiring Austrian Airlines, Lufthansa will be able to significantly increase its geographical capability throughout Europe. Lufthansa will gain improved access to international passenger flows and joint international marketing with focus on the new routes. Customers will benefit from a more diverse choice of possible travel routes, timetables and transfer cities.

This will also be improved through optimized travelling routes and a flight coordination network, as illustrated below. 4 Final Paper: Lufthansa Austrian Airlines Takeover Source: Presentation: Partnership for the future with Austrian Airlines: Information on the pillars of the combined business. (Lufthansa, 2009) According to industry forecasts, total synergies on the revenue and costs side are estimated at around EUR 80 million per annum. In terms of the industrial organisation view, the merger has the potential to result into a large hold of market share for Lufthansa, positioning the company as European market leader in the aviation sector. Issue 2: Logistical analysis

Financial advisor to the Bidder, Deutsche Lufthansa AG: JP Morgan plc; Lawyer: Freshfields Bruckhaus Deringer. Financial advisor to the Target Company, Austrian Airlines AG, Merril Lynch. The Offer has been submitted by NewCo, whose shareholders are StratCo and APF. On the basis of the Framework Agreement, StratCo has established a private foundation in order to obtain Austrian Airlines? operating license and air traffic rights. The current managing directors of NewCo are Mr. Nicolai Ingo von Ruckteschell and Mr. Arnd Peter Schwierholz, both employees of Deutsche Lufthansa AG.

In addition, a supervisory board will be |5 Final Paper: Lufthansa Austrian Airlines Takeover established at NewCo, which may consist of five supervisory board members to be assigned by the shareholders. In December 2008, Deutsche Lufthansa AG, StratCo, APF, NewCo and OIAG entered into a Framework Agreement, stipulating the basic terms between the parties relating to the sale of OIAG shares to NewCo. Further details on the future financing and capitalisation structure of Austrian Airlines, the transaction and the future organisational structure were also stipulated.

The consideration for the sale and transfer of OIAG shares was constituted in the amount of EUR 0. 01 per share, payable in cash and a warrant, dependable on the future EBITDARperformance of the Target Company, Austrian Airlines. The final agreement by Supervisory Board of OIAG to sell OIAG? s 41. 56 percent share in Austrian Airlines to Lufthansa, included the takeover of the 41. 56% share in Austrian Airlines owned by OIAG for a price of EUR 366,268. 75 with a debtor warrant.

Out of this debtor warrant, Lufthansa will pay an amount of up to EUR 162 million, depending on the future economic development of Austrian Airlines and the outperformance of Lufthansa shares. The share price was calculated based on the respective turnover volumes, quoted for the last six months, foregoing the announcement of the intention to launch an offer, which is the time period between June and December 2008 and amounts to EUR 4. 49 per Share, which is in accordance with the mandatory price requirements for mandatory offers according to Section 26 para. 1 UbG.

The Deutsche Lufthansa AG acquired all OIAG shares parallel, subject to the conditions precedent according to the Share Purchase Agreement is to be considered as an applicable acquisition. The consideration to be paid can in no case exceed the Offer Price, which is limited by an amount of EUR 4. 48 per OIAG-Share and in addition EUR 0. 01 per Share, which totals the amount of EUR 4. 49 per Share. The Federal Government of the Republic of Austria has given OIAG the authorization to sell up to 100% of its shares in Austrian Airlines pursuant to the Privatisation Mandate dated August 12th 2008.

This Privatisation mandate included and was based on conditions such as, retaining the trademark “Austrian”, maintaining of the headquarters in Austria, preservation of a route network adequate for Austria in consideration of the business and employment situation. In consequence, OIAG undertook a contractually binding security of interim |6 Final Paper: Lufthansa Austrian Airlines Takeover financing up to EUR 200 million as Rescue Aid for the Target Company. The Rescue Aid should alleviate the dramatic financial shape and its liquidity shortage connected with it.

Lufthansa has submitted a takeover offer to free float shareholders in Austrian Airlines, in accordance with takeover law, and subjected to verification by the Takeover Commission. As part of the takeover, Austrian Airlines was also subjected to perform harsh saving measures in the future, including cutting staff by more than 10 percent. The execution of these contracts depend on the their approval under Competition law, and approval by the European Commission under assistance law of a restructuring aid of EUR 500 million being paid by the Republic of Austria.

In the sense of the privatisation contract, it has been agreed upon that Austrian Airlines shall remain a legally independent company with its headquarters in Austria and retain its trademark “Austrian”. Austrian Airlines is to maintain its own identity and services, serving the market with flights predominantly from its home airport in Vienna. Deutsche Lufthansa AG has declared itself prepared to maintain Vienna as an important home airport as part of the large network of the Lufthansa Group, by also taking into consideration the needs of Vienna as a business location and taking best advantage of the geographic location.

The acceptance period for this Offer is stipulated for ten weeks. The additional acceptance period will amount to three months, in the event that this Offer is successful. The three months additional acceptance period will start as of the publication of the results for all shareholders in Austrian Airlines, who have not accepted the Offer within the regular acceptance period. Austrian Airlines shareholders, who want to accept this Offer, are advised to contact their respective Depositary Banks, and to submit their written declaration of acceptance of the Offer for a specified number of Shares.

Their acceptance of the Offer will only be accepted in this form.

The legal consequence of acceptance will be a contract for the purchase of the tendered Shares coming into existence between each accepting Austrian Airline Shareholder and the Bidder, Deutsche Lufthansa AG, on the terms and conditions set out in the Voluntary Public Takeover Offer Document. The result of this Offer will be publicized after expiry of the Acceptance Period in the “Wiener Zeitung”, as well as on the corporate websites of each party. 7 Final Paper: Lufthansa Austrian Airlines Takeover The expected time line for this takeover: December 1st, 2008: Resolution by Council of Ministers regarding payment of EUR 500 million by OIAG – Spring 2009: Public takeover offer of free float shares; Approval under cartel law expected; Conclusion of assistance process expected – April 2009 Closing: Staged operative integration Issue 3: Legal and regulatory implications

In regards to confidentiality aspects of all the transactions stages, it can be said that, as stipulated in Article 287 of the Treaty and Article 17(2) of the EC Merger Regulation as well as the corresponding provisions of the EEA Agreement, that information the negotiation partners have acquired through the application of the Regulation of the kind covered by the obligation of professional secrecy is not to be disclosed to third parties.

If any of the parties involved believes that their interests would be harmed if any of the information they are asked to supply were to be published or otherwise divulged to other parties, then this information should be separately submitted with each page clearly marked as „Business Secrets? , additionally giving reasons why this information should not be divulged or published. During the auction for the acquisition of OIAG Shares by Lufthansa, the company was legally bound to confidentiality not to disclose about the steps that were part of the auction.

In terms of meeting the requirements for merger control Deutsche Lufthansa AG and Austrian Airlines have to receive merger clearance by the EU Commission to close the deal. What could pose as a hindrance for clearance and which is also one of the significant concerns of EU competition policy in general, is the reduction of choice by consumers and a fall in market competition. This, in concrete terms, refers to the efficiency claims of the merger. For the European Commission to take account of efficiency claims, they have to benefit consumers, be mergerspecific and verifiable.

Deutsche Lufthansa AG already failed before in relation to this when |8 Final Paper: Lufthansa Austrian Airlines Takeover the European Commission cleared the acquisition of Brussels Airlines (SN) by Lufthansa, but again rejected efficiencies claims proposed by the airlines. The Commission noted that the merger had the potential to create a monopoly on routes from Brussels to Hamburg and Munich and to eliminate Lufthansa? s closest competitor on the Brussels-Frankfurt routes, indicating that the merging parties would therefore have limited incentives to pass-on any cost savings to the End-consumers on those affected routes.

A significant aspect in this current negation phase of the merger of Deutsche Lufthansa AG and Austrian Airlines is that Austrian Airlines itself has a number of subsidiaries, such as Lauda Air and Tyrolean Airways. Taking over Austrian Airlines would mean for Deutsche Lufthansa AG to become the “uncontested market leader in the European airline industry”, which might result in a change of the aviation market structure and create a potential monopolising effect on competition, as indicated as one of the reasons for the EU Commission to reject the merger, according to recital 29 of the ECMR.

A similar case, that serves as a good illustration is case of the failed Ryanair/Aer Lingus hostile takeover attempt by Ryanair, which was prohibited under the ECMR. “The two airlines were by far the largest airlines operating from Ireland and were each other? s primary competitive restraint on Irish routes. The Commission? s in-depth investigation discovered that the companies directly competed with each other on 35 routes to and from Ireland.

The effects of the proposed merger would have been to create a monopoly on 22 of those routes and to significantly reduce customer choice on the remaining 13 by virtue of a market share over 60 percent for the combined entity [.. ]” (The European Antitrust review, 2011). The European Commission might not be convinced that the agreement will allow customers to share the benefits of the expected cost savings and might exempt the agreement between Deutsche Lufthansa AG and Austrian Airlines AG subject to certain conditions and force Lufthansa to submit a wide-ranging set of remedies to conclude the acquisition of Austrian Airlines.

This remedies package could include a number of commitments such as, offering slots, to give way for new entrants to operate flights or for existing competitors to improve and expand their services on the routes where the Commission might have competition concerns, namely the routes from Vienna to Frankfurt, Munich, Stuttgart, Cologne and Brussels. New entrants could, under certain conditions, also be provided with special rights over the relevant slots, once a route has been operated by them for a specific, pre-determined period of time.

The |9 Final Paper: Lufthansa Austrian Airlines Takeover remedy package could also intend supplementary measures, in particular participation in Lufthansa’s Frequent Flyer Programme. Issue 4: Comments on condition precedents no. 1, no. 3 and no. 5 The takeover agreement between Lufthansa and Austrian Airlines includes Conditions Precedent, including anti-trust approval and the approval of a EUR 500 million restructuring grant to be made by the Republic of Austria, which both have to be granted by the European Commission.

Furthermore, Lufthansa is to hold 75 % of the shares in Austrian Airlines including those transferred by OIAG – after the end of the regular acceptance period for the public takeover bid. In regards to condition precedent no. 1 it can be said that in a voluntary offer aimed at control it is common practice that the offer is successful only if the bidder receives acceptance declarations that account for more than 50% of the voting shares of the Target Company.

In specific terms in the agreement between Lufthansa and Austrian Airlines, it is stipulated that the statutory minimum acceptance threshold of more than 50% of permanent voting shares in Austrian Airlines (without consideration of the treasury shares held by the Target Company itself) according to Section 25a para 2 UbG, whereby the shares to be acquired by the Bidder from OIAG, were to be taken into account when calculating such threshold. Therefore, acceptance declarations of 6. 96% of permanent voting shares in the Target Company were required.

Condition precedent no. refers to the approval by the European Commission of the Restructuring Aid to be made by OIAG to the Target Company in the amount of EUR 500 million, as well as the coming into force of a respective federal act enacted by the Republic of Austria regarding payment of such Restructuring Aid both by 31. 7. 2009, at the latest. Given the mathematical evaluation of the Target Company it is evident that the Offer Price by Deutsche Lufthansa AG is clearly above the equity value per Share, which is due to influences on the share price against market trends and the calculation period, that made this factors evident at the end f the consideration period.

In regards to the Restructuring Aid this leads to the conclusion that, the Restructuring Aid is necessary, because without it Austrian Airlines would be negative. | 10 Final Paper: Lufthansa Austrian Airlines Takeover This clause also refers back to the circumstance, that although 58% of Austrian Airlines is owned by private organisations and individuals, the Austrian government owned 42% through the state owned company OIAG.

Estimations for Austrian Airlines AG show that the company will lose approximately EUR 400 million for the year ending 2009, exposing OIAG to a loss of approximately EUR 175 million, which will ultimately lead to a significant liability for Austrian tax payers. This demonstrates the poor financial health of Austrian Airlines during this period, which will most likely also have an impact on the final decision to pass the merger by the European Commission.

For the reasons mentioned above, it is only logical that condition precedent no. also requires a high degree of restructuring of Austrian Airlines AG. Condition precedent no. 5 specifically refers to the financial shape of the Target Company, which is required to neither be illiquid nor subject to liquidation, nor have insolvency or composition proceedings over the assets of the Target Company or proceedings under the Austrian Restructuring Act been initiated nor to have an application for the commencement of insolvency proceedings been dismissed by the competent court due to lack of sufficient funds for covering the costs of such.

This clause clearly serves as sort of reassurance for Deutsche Lufthansa AG in terms of the merger sailing through on the one hand, but most importantly having some sort of financial back-up. Considering the economic state of Austrian Airlines during this negotiation phase, it is obvious that this is a great opportunity for Lufthansa to strike a deal on favourable terms, which however also comes with several risks as described above.

For those reasons it is of paramount importance that Austrian Airlines (and OIAG) meet and fulfil the requirements levied upon them, to successfully close the deal. 11 Final Paper: Lufthansa Austrian Airlines Takeover Issue 5: Current status The German airline Lufthansa completed its acquisition of Austrian Airlines in September 2009, costing Lufthansa EUR 220 million. The financial year 2010 saw the first significant successes: Austrian Airlines was able to further improve its market position at the Vienna hub, increasing its market share by 1. 4 percentage points to 50. 9 percent. Still it has to be mentioned that, the revenue level in European traffic is still below expectations. Still, on the long-haul traffic showed clear signs of recovery.

The upturn in corporate customer business led to a positive development in average yields. Lufthansa Cargo and Austrian Airlines merged their global freight operations, including sales and flights in 2010. “Vienna will become a central European hub for Lufthansa Cargo — comparable to our German hubs at Frankfurt and Munich,” said Carsten Spohr, chief executive officer and chairman of Lufthansa Cargo. Lufthansa Cargo customers also will benefit from access to Austrian Airlines direct flights to global destinations, Spohr said. (AUA press release, 2010)

The carriers said that the flow of cargo through their Frankfurt, Munich and Vienna hubs were optimized and their global distribution activities merged and product portfolios and processes harmonized. The two airlines jointly route cargo through Vienna and boost traffic through the airport, integrating their freight handling and distribution operation in the country. In all other worldwide markets, freight will be combined under the Lufthansa Cargo brand.

“This marks a further step in the reorganization of Austrian Airlines,” said Andreas Bierwirth, chief commercial officer of Austrian Airlines. Our cargo business will benefit from the new structure. We will lower our costs and improve our product portfolio. At the same time, we will be able in future to provide our customers with a globe-spanning network and the extensive product portfolio of the world’s largest air cargo alliance. ” (AUA press release, 2010). | 12 Final Paper: Lufthansa Austrian Airlines Takeover The restructuring measures implemented by Austrian Airlines, in concrete numbers means that around 1,000 jobs had to be cut from a total 7,300 positions at Austrian Airlines.

Among the conditions for EU approval, Austrian Airlines had to reduce capacity by about 15 percent by the end of 2010. The Supervisory Board appointed Thierry Antinori as Chairman of the Executive Board of Austrian Airlines with effective April 1 st, 2011. Before that, he was on the Lufthansa German Airlines Board, responsible for marketing and sales. This appointment will make the Executive Board members for Austrian Airlines three.

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