Air France-KLM launches 2.3 billion euro share sale

© Reuters. FILE PHOTO: Passengers wait at the Air France desk at Nice international airport, France, February 20, 2020. REUTERS/Eric Gaillard

By Tim Hepher

PARIS (Reuters) -Air France-KLM on Tuesday launched a 2.26-billion-euro ($2.41 billion) share sale to shore up its balance sheet and repay some French state aid as it seeks shareholder backing to look beyond the pandemic and invest in resurgent air travel.

The second rights issue in just over a year brings Europe's second-largest airline by revenue closer to repaying government pandemic support and meeting European Union conditions for participating in any future airline consolidation.

European airlines are experiencing a surge in ticket sales clouded by fears of a recession triggered by inflation and the war in Ukraine.

Chief Executive Ben Smith said the widely anticipated move was part of efforts to "strengthen our financial autonomy" and regain strategic and operational flexibility.

"As the recovery continues and our economic performance recovers...we want to be in a position to seize any opportunity in a changing aviation sector and to be able to accelerate our environmental commitments," he said in a statement.

Air France-KLM shares were down 6.9% by late morning.

The group confirmed a goal of reducing the ratio of net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) to around 2.0-2.5 by 2023.

"With good outlook for its EBITDA in the coming quarters plus further improvement of its operations mid term, in our view the rights issue will be received well," ING said in a note.

But it cautioned there were open questions on issues including the strength of airline competition.

Analysts say some low-cost carriers have emerged strengthened from the crisis by using it to drive down costs.

Air France-KLM said 1.7 billion euros of the share proceeds would be used to repay French aid granted in the form of subordinated bonds in April last year.

STATE SHAREHOLDINGS STABLE

The move comes as Italy is looking for bids for ITA Airways, the successor to Alitalia.

Likely bidders include a consortium led by U.S. private equity fund Certares and involving Air France-KLM, two sources close to the matter said on Monday.

Air France-KLM declined to comment on ITA on Tuesday.

On Friday, the Franco-Dutch group disclosed a separate plan to raise 500 million euros through the injection of capital by private equity firm Apollo Global Management (NYSE:APO) into a maintenance unit which controls a pool of spare engines.

Those funds will also contribute to repaying French aid.

Air France-KLM is drawing up further measures to raise funds to pay back outstanding state debt on top of the Apollo deal and the latest rights issue.

In February, it said it planned to raise up to 4 billion euros.

The rights issue for existing shareholders will run from May 27 to June 9 at 1.17 euros per new share or 3 new shares per existing share.

The French and Dutch states, the two largest shareholders, plan to participate and keep their holdings unchanged.

The plan also makes room for French shipping company CMA CGM to become a core shareholder in Air France-KLM after the two firms announced a tie-up in the freight sector last week.

CMA has pledged to buy up to 400 million euros' worth of shares, capping its new shareholding at 9%.

China Eastern Airlines (NYSE:CEA) and Delta Air Lines (NYSE:DAL) will see their stakes reduced, however.

The two partners are participating on a "cash neutral" basis by selling part of their rights to CMA and then using those net proceeds to take part in the issue, Air France-KLM said. Their stakes will fall to 4.7% and 2.9% respectively.

($1 = 0.9376 euros)