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(Alliance News) - Stobart Group Ltd on Monday said it has agreed to acquire Stobart Air and Propius for up to GBP8.6 million from administrators Ernst & Young, taking back control after their sale to joint venture Connect Airways.
Earlier in April, Stobart Group confirmed it was reviewing the possible acquisitions of Stobart Air and aircraft leasing business Propius.
Stobart Group owned Stobart Air and Propius before they were sold as part of its involvement in a joint venture to buy budget airline Flybe Group in February 2019. This included the disposal of Stobart Air and Propius to Connect - a joint venture which included Stobart Group as well as Virgin Atlantic Ltd and Cyrus Capital Partners.
In March, Flybe collapsed into administration as it was hit hard by the Covid-19 outbreak. Crisis talks were held to try to secure a rescue package, but no deal was agreed. All Flybe flights and those operated by Stobart Air were cancelled, although Stobart Air and Propius operated independently within Connect and were not affected by Flybe's administration.
Stobart Group is a guarantor for a number of Propius obligations under a sale and leaseback of aircraft agreement inked in April 2017. This includes maintenance commitments. Further, Stobart Group also granted guarantees "with respect to the obligations owed by Stobart Air arising under the franchise agreement with Aer Lingus and certain fuel and currency hedging arrangements entered into when the businesses were under Stobart Group ownership".
These guarantees had to remain with Sotbart Group after the Connect sale. On top of which, as part of the Connect sale, Stobart also agreed to continue making repayments as part of a maintenance reserve loan advanced by Propius, instead of making a single repayment when the deal was complete.
"The board of Stobart Group has reviewed all options available to the company in relation to the future of Stobart Air and Propius during this unprecedented time. This included allowing the businesses to enter some form of insolvency process and a range of ways to support them going forward particularly in light of the strong relationship which exists between Stobart Group and Aer Lingus," said Stobart Group.
"The board has concluded that the best course of action financially for the company and its shareholders is for it to buy back Stobart Air and Propius. This action will give Stobart Group effective control over the pre-existing obligations it has in respect of those businesses. The intention is that Stobart Group will continue its current positive dialogue with Aer Lingus to conclude a long-term franchise extension and ensure that the businesses are put on a sound financial footing," the company added.
Stobart Group said it is still intends to work with Aer Lingus on finding a new financial partner who can support the business and work with Stobart Group on its exit "in a controlled way". Aer Lingus is a unit of International Consolidated Airlines Group SA.
Stobart Group will pay a maximum of GBP8.6 million for Stobart Air and Propius. This consists of an initial GBP300,000 cash consideration to be paid on completion, plus a further GP2 million deferred payment by December 15 at the latest plus a deferred consideration, topping out at GBP6.3 million, to be paid on the equity value on the sale of both Stobart Air and Propius.
Going forward, Stobart Group said it plans to fund the operations of both Propius and Stobart Air "through to achieving positive cash flow" with both businesses having already worked to shrink cash requirements during the pandemic. Overall, Stobart Group expects to pay around EUR25 million over the coming 12 months, including lease payments, to fund the re-acquired businesses.
Once the deal is complete, Stobart Group will hold a 40% voting interest and 75% economic interest in Everdeal 2019 Ltd, the ultimate holding company of both Propius and Stobart Air. It will also hold a 15% shareholder in "the company that holds the remaining 60% voting interest and 25% economic interest" Everdeal 2019, while the Stobart Air employee benefit trust owns the rest.
Thus, Stobart Group will hold a 78.75% effective indirect interest in Stobart Air and Propius. This structure is required to make sure Stobart Air meets its requirements for operating out of Ireland.
Under the deal, Stobart Group said, the "EUR20 million loan by Stobart Group to Everdeal 2019 and then novated from Stobart Group to Connect as part of the Connect sale, will be novated back to Stobart Group.
As at August 31, 2019, Propius and Stobart Air had combined gross assets worth GBP91.2 million. Propius's annual commitments under aircraft leases amount to USD15.4 million per annum through to April 2027 with a break clause in April 2023 should the Aer Lingus franchise not be extended, on payment of a USD21.2 million break fee. In the year ended February 2019, Stobart Air and Propius made a combined pretax profit of GBP5.5 million.
Stobart Group Chief Executive Warwick Brady said: "This transaction allows Stobart Group to take control of the outstanding legacy issues which date back to 2017 when Stobart Air and Propius became subsidiaries of the company. The original strategy to mitigate these issues over time through the combination of the businesses with Connect was impacted by the failure of Flybe and resulting administration of Connect in March 2020. We believe that Stobart Air has a viable future after Covid-19 and are working with Aer Lingus as our franchise partner to place the business on a secure footing and manage the impact of the legacy obligations in a controlled manner."
Shares in Stobart Group were down 1.2% at 62.24 pence in London on Monday morning.
By Anna Farley; annafarley@alliancenews.com
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