The Irish government announced Tuesday it won't sell its 25 percent stake in Aer Lingus to Ryanair because a merged airline would be likely to undermine competition and jobs at the former state carrier.
The decision by Ireland's full Cabinet makes it harder for Dublin-based Ryanair, the biggest budget airline in Europe, to acquire its main Irish competitor. But in a typically defiant response, Ryanair said it still expected to take over Aer Lingus and didn't need the cash-strapped government's support to do this.
Ryanair is Aer Lingus' biggest shareholder with a 30 percent stake. Aer Lingus is suing Ryanair in an effort to force its rival to divest. In June, Ryanair launched its third hostile takeover bid since 2006, offering €1.30 ($1.72) per share, a 38 percent premium over Aer Lingus' market value and representing a potential €170 million windfall for Ireland's cash-strapped government.
But Irish Transport Minister Leo Varadkar said the Ryanair offer "does not satisfy our concerns about connectivity, competitiveness or employment for Ireland."
The government announced its decision after European markets closed. Earlier, Aer Lingus shares rose 2 percent to €1.08.
Varadkar's comments reflected deep-seated concerns that the takeover would allow Ryanair to control around four-fifths of all air links between Ireland and Britain, leaving it in position to drive up prices. Ryanair insists it would drive down average ticket prices and greatly expand Aer Lingus services to both continental Europe and the United States.
The European Commission in 2007 rejected Ryanair's initial bid on the ground that it would create an effective monopoly. Ryanair since has insisted the airline landscape in Europe is changing dramatically with myriad failures of regional airlines and huge merger deals. The commission's competition authorities are still mulling Ryanair's new bid.
In its response, Ryanair said the Irish government "has no power to block Ryanair's offer" because 45 percent of Aer Lingus shares are held by private investors or Aer Lingus employee-controlled trusts. Those trusts likewise oppose a Ryanair takeover because of its hostility to labor unions.
Ryanair noted that Ireland needs the money since it is trying to climb out of a 2010 international bailout and is supposed to sell state assets as part of its recovery agreement with European Union partners and the International Monetary Fund.
Varadkar said the government did want to sell its Aer Lingus shares "at the right time under the right conditions."
One other potential suitor is Abu Dhabi-based Etihad Airways, which this year has acquired a 3 percent stake in Aer Lingus.