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German Mexican standoff

23 June 2020 By Ed Cropley

German billionaire Heinz Hermann Thiele’s threat to shoot down Deutsche Lufthansa’s 9 billion euro ($10 billion) bailout may not be as suicidal as it sounds. Tipping the ailing airline into bankruptcy would wipe out the 79-year-old brakes tycoon’s 715 million euro investment, but would also humiliate Chancellor Angela Merkel’s administration. There’s a way out that benefits them both.

Shareholders have little reason to grumble about Lufthansa’s rescue. Berlin is picking up a 20% equity stake in the carrier at a 75% discount to the current share price, but it is also extending a 3 billion euro loan and injecting another 5.7 billion euros of hybrid equity via a so-called “silent participation”. Had the government insisted on buying ordinary shares, existing investors would have ended up with a minority stake in a state-controlled company.

It should therefore be easy to dismiss Thiele’s gripe that Berlin has no business owning chunks of private companies. However, his 15.5% stake in Lufthansa gives him the power to block the rescue, which requires the support of at least two-thirds of shareholders. Just 38% of them have registered to vote at Thursday’s meeting.

Tipping Lufthansa into insolvency would wipe out Thiele’s investment, and could also leave him liable for the losses of other shareholders. Yet there are several reasons why the government may not call his bluff. A bankruptcy would be deeply damaging for corporate Germany, already reeling from the implosion of payments group Wirecard. And it would give Berlin even less say over the fate of the airline’s 138,000 employees.

Besides, Merkel is probably broadly sympathetic to Thiele’s view. In the rescue’s long gestation, her conservative CDU party only wanted the government to have a 10% stake, compared to the 20% demanded by her social democrat SPD coalition partners.

This provides scope for compromise. If Thiele were permitted to participate in the equity offering on the same terms as the government, Lufthansa would get its money, but Berlin’s role would be diminished. That would sit comfortably with Merkel and Thiele. The SPD and other shareholders would be less pleased, but with insufficient time to organise a full rights issue, there’s not much the latter can do. Besides, a slightly smaller government holding would be in the interests of all private investors.


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