Air France Seeks to Buy Alitalia; Lufthansa Drops Out

Air France-KLM Group, the world's biggest airline, said it will offer to buy Alitalia SpA and revive the unprofitable carrier that the Italian government has been trying to sell for a year.

Deutsche Lufthansa AG of Germany said today it won't bid, leaving Air France to compete with Air One, Alitalia's biggest domestic competitor, for the acquisition. Air France would designate Rome as Alitalia's main hub and retain flights from Milan, the Paris-based company said in a statement today. Alitalia's board will meet tonight to evaluate offers.

Alitalia hasn't reported an operating profit in nine years and is losing more than 1 million euros ($1.5 million) a day. The government gave Chairman Maurizio Prato a mandate to seek a buyer for the state's 49.9 percent stake to cut losses and save Italy's national carrier from bankruptcy. European airlines are looking for mergers as a new ``open skies'' treaty increases competition on U.S. routes.

``Air France is the leading candidate,'' said Karim Bertoni, a fund manager at Banque Syz & Co. in London who helps manage $24.8 billion. ``Air France seems to consider Alitalia a domestic company to help bring passengers to Paris. The purchase will be a risk.'' Bertoni doesn't hold Alitalia stock.

Shares of Alitalia, which plans to choose a partner for exclusive talks by the end of the month, rose as much as 5.7 cents, or 6.8 percent, to 90 cents, giving a market value of 1.23 billion euros. They were trading at 87 cents as of 10:33 a.m. in Milan, cutting declines this year to 17 percent.

Air France advanced 0.5 percent to 23.37 euros. The stock has dropped 27 percent this year for a value of 7 billion euros.

No Premium

``No one is going to pay a premium for Alitalia,'' said Gianmaria Bergantino, head of asset management at Bank Insinger de Beaufort NV in Rome, who owns Alitalia convertible bonds. ``Whoever buys it is buying it for its airport slots.'' He spoke before the announcement was made.

Air France-KLM has sent a non-binding expression of interest, it said today's statement. The company already owns about 2 percent of Alitalia, which was initially slated to join the 2004 merger between the French and Dutch airlines. The Italian carrier was excluded because of mounting losses.

Board Meeting

Alitalia's board of directors will meet tonight in the Italian capital to evaluate bids presented to its adviser, Citigroup Inc. It won't release financial details.

The carrier may not fetch much because it has about 1.2 billion euros in debt and is hobbled by growing competition in Italy, analysts said.

``Our implied equity valuation for Alitalia, calculated on the basis of the future financial forecasts, appears to fall below zero, unless airfares rise materially,'' Deutsche Bank analysts including Chris Reid said Nov. 28.

The decision on the bidders has been delayed repeatedly and the last attempt to sell the stake was canceled in July after seven months. All the potential buyers dropped out, some objecting to state-imposed preconditions, including maintaining the national character of Alitalia and protecting jobs. TPG Inc., the Fort Worth, Texas-based buyout firm, was among the bidders that walked away.

Italian Advantage

Air One, backed by Intesa Sanpaolo SpA, the country's second- largest bank, confirmed yesterday that it will bid and may be favored this time because it's the only Italian suitor, Bergantino said.

``The most viable hypothesis from the government's point of view is for Alitalia to stay in Italian hands,'' he said.

Prime Minister Romano Prodi said yesterday that the government isn't biased against a foreign offer.

``What we want for Alitalia is to have a business plan which will strengthen Alitalia and naturally provide an efficient and healthy airline,'' he said at a press conference in Naples.

Alitalia shares had fallen 20 percent this year before today, twice the decline of the Bloomberg Europe Airlines Index. The carrier on Nov. 13 forecast a loss before interest and tax of more than 200 million euros this year. Its market value has fallen to 1.2 billion euros, about the same as the debt level, and its fleet of jets is in need of upgrading.

Alitalia started flying 60 years ago and as of Sept. 30 had 185 planes, 29 of them dedicated to long-haul routes. Seventy-five planes are old MD-80s used for short- and medium-haul flights. The company serves more than 60 destinations.

A buyer may have to invest in new planes soon because Alitalia's fleet has an average age of 12.1 years, compared with 8.8 years at Air France.