Lufthansa bailout sparks debate in government about direct stake

The German government is engaged in last-minute debates over the details of its bailout of Deutsche Lufthansa AG, with Chancellor Angela Merkel seeking a deal that doesn’t involve a direct stake in the national carrier, while her deputy, Finance Minister Olaf Scholz, favors such an investment, according to people familiar with the matter.

Under a scenario preferred by the chancellery, as well as the transport ministry and the airline itself, the German government would buy a convertible bond in Lufthansa that could later be exchanged into a direct stake that could be lower than 25%, the people said, declining to be identified because the matter is private.

The move would still enable the government to pocket a financial gain and protect the airline from a potential takeover.

The Finance and Economy Ministries, on the other hand, have in principle agreed on taking a 25% plus one share stake in the airline at discount price of 2.56 euro per share, the nominal value of Lufthansa’s shares on the balance sheet, other people said.

While there is debate inside the government, reaching an accord in principle on the terms of the bailout still seems doable this week, other people said. Details could still change and talks could stretch into next week, said the people.

Shareholders

One issue being considered is Lufthansa’s shareholder base, which could block the bailout at an extraordinary shareholder meeting that the airline would have to convene to get the rescue package approved, some of the people said.

Germany has entered into informal talks with the European Commission to move along the planned 9 billion-euro ($9.8 billion) bailout package aimed at keeping the airline aloft, according to some of the people.

Among demands by European regulators, in accordance with new subsidy rules outlined last week, is that the government dispose of its stake again after no more than six years.

The step forward comes after the two sides came closer to an agreement on government appointments to the carrier’s supervisory board, the people said. Berlin is prepared to nominate neutral representatives to the panel to limit the political influence on strategic decisions, a proposal that Lufthansa is prepared to accept, they said.

The Finance Ministry insists on the direct stake to secure veto powers, prevent possible hostile takeovers of the carrier and generate a financial return for injecting capital, some of the people said. Merkel, on the other hand, is less keen to see the government become a dominant shareholder in the carrier. Lufthansa and representatives for the government declined to comment.

Lufthansa is running out of time and money, burning through 800 million euros each month after the coronavirus grounded most of its fleet. The carrier will double the number of active jets to 160 from June 1, and stands to lose more money if the tentative return to flying isn’t profitable. Chief Executive Officer Carsten Spohr last week said the company had about 4 billion euros in cash remaining.

The planned aid package would also include loans and a so-called silent stake similar to preferred stock. The state-owned shares may be issued at their nominal value, providing the government with a deep discount on its investment.