Air France-KLM AIRF.PA has said that it had entered exclusive talks with private equity firm Apollo APO.N for a €500 million capital injection for one of its engineering and maintenance units to help repay French state aid.
"The proceeds of the transaction would enable Air France-KLM and Air France to partially redeem the French state perpetual bonds," the airline said, adding it would not involve any operational or workforce-related changes.
The airline's current market capitalisation is €2.73 billion.
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An Air France-KLM spokesperson said the deal with Apollo Global Management would not result in the buyout firm taking an equity stake and was "purely financial".
The Air France-KLM unit involved owns a pool of spare engines.
A source close to the matter said revenue would be generated through "giving Air France access to this spare engines pool".
Sale and leaseback deals are common financing mechanisms in aviation, allowing airlines to sell freshly delivered planes and engines to lessors and rent them back to lighten their balance sheets.
But a flood of investment from new sources of funding has increased competition for traditional leasing companies.
The Dutch finance ministry, a shareholder in the airline group, said it supported the proposal.
"Attracting private investors is good for the financial position of the company. We have a common interest that it frees itself of state aid," the ministry told Reuters.
At 1215 GMT on Friday 20 May, Air France-KLM shares were up 2.8% to €4.37, extending near-double digit gains this year.
Air France-KLM said in February it planned to raise up to €4 billion to repay support it received during the pandemic.
It said this month it was considering measures such as a capital increase and quasi equity instruments to speed up payments to the French state, its top shareholder.
Shipping firm CMA CGM announced last month that it would take a major stake in Air France-KLM.
Air France-KLM Launches €2.3bn Share Sale
The above news was followed by news that Air France-KLM AIRF.PA on Tuesday 24 May launched a €2.26 billion share sale to shore up its balance sheet and repay some French state aid as it seeks shareholder backing to look beyond the pandemic and invest in resurgent air travel.
The second rights issue in just over a year brings Europe's second-largest airline by revenue closer to repaying government pandemic support and meeting European Union conditions for participating in any future airline consolidation.
European airlines are experiencing a surge in ticket sales clouded by fears of a recession triggered by inflation and the war in Ukraine.
Chief executive Ben Smith said that the widely anticipated move was part of efforts to "strengthen our financial autonomy" and regain strategic and operational flexibility.
"As the recovery continues and our economic performance recovers...we want to be in a position to seize any opportunity in a changing aviation sector and to be able to accelerate our environmental commitments," he said in a statement.
Air France-KLM shares were down 6.9% by late morning on Tuesday 24 May.
The group confirmed a goal of reducing the ratio of net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) to approximately 2.0-2.5 by 2023.
"With good outlook for its EBITDA in the coming quarters plus further improvement of its operations mid term, in our view the rights issue will be received well," ING said in a note.
But it cautioned there were open questions on issues including the strength of airline competition.
Analysts say some low-cost carriers have emerged strengthened from the crisis by using it to drive down costs.
Air France-KLM said that €1.7 billion of the share proceeds would be used to repay French aid granted in the form of subordinated bonds in April last year.
State Shareholdings Stable
The move comes as Italy is looking for bids for ITA Airways, the successor to Alitalia.
Likely bidders include a consortium led by US private equity fund Certares and involving Air France-KLM, two sources close to the matter said on Monday 23 May.
Air France-KLM declined to comment on ITA on Tuesday 24 May.
On Friday, the Franco-Dutch group disclosed a separate plan to raise €500 million through the injection of capital by private equity firm Apollo Global Management APO.N into a maintenance unit which controls a pool of spare engines.
Those funds will also contribute to repaying French aid.
Air France-KLM is drawing up further measures to raise funds to pay back outstanding state debt on top of the Apollo deal and the latest rights issue.
In February, it said it planned to raise up to €4 billion.
The rights issue for existing shareholders will run from 27 May to 9 June at €1.17 per new share or three new shares per existing share.
The French and Dutch states, the two largest shareholders, plan to participate and keep their holdings unchanged.
The plan also makes room for French shipping company CMA CGM to become a core shareholder in Air France-KLM after the two firms announced a tie-up in the freight sector last week.
CMA has pledged to buy up to €400 million worth of shares, capping its new shareholding at 9%.
China Eastern Airlines 600115.SS and Delta Air Lines DAL.N will see their stakes reduced, however.
The two partners are participating on a "cash neutral" basis by selling part of their rights to CMA and then using those net proceeds to take part in the issue, Air France-KLM said. Their stakes will fall to 4.7% and 2.9% respectively.