Swiss International Air Lines was set to ask major shareholders to back a takeover by Lufthansa on Monday as the unprofitable carrier attempts for the second time a tie-up with its German neighbor.
The airlines confirmed on Sunday that they were in talks over a deal in which Lufthansa would make an offer to buy out Swiss's small shareholders, who account for around 14 percent of its capital, if larger shareholders agree.
Major shareholders, which include the Swiss government and banks UBS and Credit Suisse were expected to attend the meeting on Monday, a source close to the negotiations said.
Swiss declined to comment on the meeting, which had been widely reported in Swiss media.
"We will look at (the conditions), form an opinion and inform Swiss," a UBS spokeswoman said.
A government spokeswoman in Berne said that the future of Swiss airports and the brand Swiss were paramount.
"The most important thing for the government is that Switzerland remains fully connected to international air traffic. Also important are the jobs. We have to wait and see how any agreement might look," Elisabeth Meyerhans said.
Credit Suisse declined to comment.
Shares rise
Lufthansa stock was 1.34 percent higher at 11.32 euros while shares in Swiss were 7.69 percent higher at 11.20 francs at 1203 GMT.
A spokesman for Swiss said the airline, regardless of the talks with Lufthansa, aimed to cut costs, with 800 to 1,000 job cuts pending.
"The turnaround program announced in January will go ahead in any case," he said. "We want to conclude the negotiations with Lufthansa as quickly as possible."
The timing of a deal remained unclear, however.
Lufthansa, which is being advised by Deutsche Bank, is expected to make an offer based on the average share price of recent weeks, a source close to the negotiations said. This could translate to about 50 to 60 million euros ($67-$80 million) for the shares in free float.
Major shareholders would receive only a token amount but analysts expect them to accept.
"The major shareholders will be happy if they don't have to put in more cash and if Lufthansa makes the necessary guarantees," Patrik Schwendimann at ZKB said in a note.
Analysts said the deal was cheap and made good sense.
"This time it will work out," said analyst Per-Ola Hellgren at LRP. "The acquisition would make sense. Lufthansa has said explicitly in the past that it would only buy Swiss if there were synergies."
He said the acquisition of Swiss would contribute a few cents to Lufthansa's earnings per share in 2006 or 2007.
While Swiss is expected to retain its brand and hub at Zurich the deal would end efforts to keep a wholly Swiss-owned flag carrier flying after Swissair was grounded in 2001.
Swiss walked away from a previous attempt at a tie-up with Lufthansa in 2003, although the German carrier maintained at the time it was open to discussions.
Swiss has continued to cut costs since, lowering its net loss to 140 million francs in 2004 from 687 million a year earlier.
By: N. Peter Kramer
