DUBLIN (Reuters) - Aer Lingus (AERL.I) called on shareholders to resist budget carrier Ryanair's (RYA.I) 700 million euro ($880 million) takeover bid as the rival Irish airlines dig in for a corporate battle that looks likely to drag into next year.
Both airlines said they did not expect EU antitrust regulators to approve the 694 million euro ($849 million) takeover bid for the former state carrier in a decision due by Wednesday.
Instead they expect it to move to a longer Phase II process that can last up to 105 working days, which would push a resolution into next year.
While Ryanair promised to offer the EU "radical remedies" to address competition concerns, Aer Lingus said the bid was doomed to fail.
"Ryanair's offer is not in the interests of shareholders, fundamentally undervalues the business and is likely once more to be prohibited by the European Commission," Aer Lingus said in a statement to shareholders published on Friday.
"The board re-affirms its recommendation that shareholders should reject the offer," it said.
Aer Lingus' shares have gained 14 euro cent to 1.08 since Ryanair announced its bid in June, but remain 22 cents short of the offer price, implying that many traders are yet to be convinced that the bid will be successful.
The European Commission, which acts as EU competition watchdog, is among the biggest impediments to a deal which was announced in June and is Ryanair's third attempt to take over the former state carrier.
The EU executive blocked Ryanair's 2007 attempted takeover of Aer Lingus, saying the combined group would monopolise or dominate 35 routes, leading to consumers paying more. It said Ryanair had not offered to give up enough airport slots to allay its concerns.
THIRD PARTY COMPETITION
Ryanair, which already owns 30 percent of Aer Lingus, dropped its second offer in 2009.
In its statement, Aer Lingus said the commission would likely reject the takeover bid, something it can only do after a Phase II probe.
Ryanair CEO Michael O'Leary told journalists in Madrid on Thursday he expected the commission to move to Phase II but said he would offer unspecified remedies to allay competition concerns.
Analysts expect him to try to convince rival airlines to commit to compete on the 44 routes where Ryanair and Aer Lingus currently have no third-party competition.
Ryanair has already held talks with British Airways (ICAG.L) and Virgin Atlantic VA.UL about possibly opening routes to compete with a combined Irish airline, according to a source with knowledge of the talks.
Virgin has spoken to both Ryanair and Aer Lingus recently about airport slots, a second source said. Ryanair, Virgin and British Airways all declined to comment.
But to allay competition concerns, Ryanair will have to go beyond the London hubs of British Airways and Virgin, and show there will be sustainable competition on the 50 routes they compete on across Europe.
"If they could get British Airways or Virgin on board, that would be one tick in the box, but they will need much more than that. The trick is proving competition across the network," said Merrion Capital analyst Gerard Moore.
Moore said Ryanair has a "fighting chance" of securing approval, but said reversing the European Commission's decision to reject an earlier bid would be difficult. "It's tough, but not impossible," he said.