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After several weeks of rowing Lufthansa has apparently reached an agreement with the German Government about a nine Billion Euro heavy Bailout package that will see part of the carrier shift ownership to the state.

The agreement as it now stands sees 20% of Lufthansa to go to the German state, additionally 5% as a convertible bond as well as a three Billion Euro loan to guarantee liquidity.

Another detail which will prove to be relevant for how Lufthansa is running it’s business in the future is that the government will appoint two members to the supervisory board, however these individuals won’t be politicians or government officers but (prominent?) figures of the business world.

Germany’s Handelsblatt reported about the negotiation this morning (access here).

This deal has to be accepted by both Lufthansa shareholders as well as the European Union. Should any of these not accept the option, time has almost certainly run out for new negotiations and Lufthansa likely go into administration.

It could very well be that shareholders aren’t too happy about the deal as the government won’t buy at the regular trading rate but a vastly discounted one, leading to the remaining shares being diluted.

Lufthansa will call an extraordinary shareholders meeting to get approval for this deal. This comes suspiciously late as Lufthansa held their regular shareholders meeting just two weeks ago on May 5th 2020 while the crisis was already on it’s peak and it was clear that Lufthansa would need government assistance. Instead they (LH) spun this along and now requiring a separate convention to receive approval.

Even with two seats on the board the government won’t be able to block key decisions of company management as only 20% of the shares are acquired directly while the other 5% will be a convertible bond.

Nevertheless the rescue package is substantial, running roughly 9 Billion Euro. There was a disagreement within the government as the Finance Ministry (led by the Social-Democrats) wanted more say in management decisions but the Economic Ministry (led by Merkels CDU) advocated for the government to stay out of business matters.

According to Handelsblatt Lufthansa Management worries about getting the government out of the company again especially if the crisis will take years.

Meanwhile passengers are still waiting for their cancelled tickets to be refunded as Lufthansa has ceased all refunds since late March, creating a backlog of Billions in due refunds and therefore helping themselves to a convenient interest free loan on the expense of the customers.

There has also been very little talk about staff redundancies and possible layoffs even though it’s clear that the airline is not in any position to keep all of their employees on payroll during times where their traffic shrank 95%. From June onward the carrier plans to gradually increase the schedule again but it will be nowhere near normal operations.

Conclusion

LH CEO Carsten Spohr has gambled and at least achieved the concession that the government won’t be able to directly thwart any key decisions during board meetings. Nevertheless beggars can’t be choosers and it’s either accepting this compromise or going to bankruptcy court and filing for controlled insolvency as Lufthansa has already considered weeks ago.

We see all sort of deals taking an unexpected turn at the very last minute these days and I wouldn’t be surprised if there is yet another curveball coming LH’s way. Should the shareholders or the EU (the latter being unlikely) refuse this deal then it’s back to square one and Lufthansa will likely run out of cash, therefore having to file for insolvency.

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