Owl says: East Devon really does seem to be a very complicated place to do business!
“Flybe’s biggest shareholder has launched a stunning attack on its directors, accusing them of breaching their duties to investors and threatening a legal challenge to the cut-price takeover of one of Britain’s best-known airlines.
Sky News has learnt that Hosking Partners, a prominent London-based asset manager which holds a stake of close to 19% in Flybe, has instructed lawyers to explore its options in relation to the company’s proposed sale to a consortium led by Virgin Atlantic Airways.
These options could include attempting to obtain an injunction prohibiting the deal from being completed, Hosking Partners is understood to have warned Flybe’s bosses this week.
The initial 1p-a-share deal, announced eight days ago, came at a huge discount to the airline’s prevailing share price and underscored its industry’s profound financial challenges.
In a letter to the directors of Flybe, details of which have been relayed to Sky News, Hosking Partners is understood to have expressed concern that they had allowed a false market in the company’s shares to develop by failing to update the City on its financial position in a timely fashion.
The fund manager, a long-standing shareholder in Flybe, is understood to have copied its letter to City watchdogs including the Takeover Panel, which polices mergers and acquisitions activity, and the Financial Conduct Authority.
Hosking Partners is said to have raised doubts as to whether the £2.2m offer reflected the intrinsic value of Flybe, and alleged that the handling of its proposed sale had blocked a rival offer from emerging at a higher price.
Flybe’s fate took a further twist this week when it said that its sale to Connect Airways – a consortium comprising Virgin Atlantic, Stobart Group and Cyrus Capital Partners, an investment fund with links to the other two parties – would be restructured.
Instead of simply comprising a conventional offer for the shares, Flybe’s trading assets would be sold next month to Connect Airways for £2.8m, leaving the holding company as a shell for which the consortium would continue to pay a nominal sum.
Flybe said this change had been necessitated by its urgent need for liquidity – a claim challenged by Hosking Partners because of the company’s cash balance and ability to raise funds from the sale of assets such as its take-off and landing slots at London Gatwick Airport.
In a statement to the market on Tuesday, Flybe said it had had no alternative but to agree to the revisions because unspecified conditions attached to a bridging loan had not been met.
Hosking and other shareholders are said to be furious about the restructuring of the takeover because Flybe’s recent switch from a premium to a standard listing on the London market meant investor approval was now only required for the holding company bid, not the sale of the airline’s assets.
The fund manager is understood to have told Flybe directors that other parties remained interested in acquiring the airline but would now be unable to make an offer.
At the 1p-a-share offer price, Hosking Partners’ stake is worth roughly £400,000.
If it escalates, the row could pose significant reputational risks to the board of Flybe, which is chaired by Simon Laffin, a City grandee who has served as a director of companies including Mitchells & Butlers, Northern Rock and Safeway.
Investors’ anger has been exacerbated by the fact that early last year, Stobart made a takeover approach to Flybe understood to have been valued at roughly 40p-a-share.
This was rejected by Flybe’s board.
In a further development, Sky News revealed last week that Stobart’s estranged former chief executive, Andrew Tinkler, had himself swooped to snap up a stake of more than 10% in Flybe.
Until as recently as this month, it appeared that Virgin Atlantic and Stobart were likely to table competing offers for the regional airline, before it emerged that they had teamed up as part of the same consortium.
Hosking is understood to have raised concerns in its letter about the process through which they were permitted to form an alliance, although one source close to Flybe said that it had not breached any undertakings by doing so.
The investor is also said to have highlighted the rise in Stobart Group’s share price following confirmation of the 1p-a-share bid as evidence of “value transfer” from Flybe to one of its acquirers, according to a City source.
Under their plans, Stobart Air will be folded into Connect, with all of Flybe’s services re-branded under the Virgin Atlantic name.
The chief executive and chief financial officer of Flybe will transfer to the bidding consortium, according to documents published by the company.
Hosking Partners’ letter is said to enquire about any incentive payments due to either of the duo as a result of the consortium’s takeover.
In a statement, a Flybe spokesman said: “The board of Flybe was faced with a very tough decision based on Flybe’s current difficult liquidity position and the expectation that this pressure will continue.
“Obtaining the revised facility, as announced on 15 January, from the consortium provides the security that the business needs to continue to trade, which preserves the interests of its stakeholders, customers, employees, partners and pension members.
“Flybe will be responding directly to letters received from shareholders.”
Flybe launched a formal sale process last autumn, blaming a toxic cocktail of currency volatility, rising fuel costs and Brexit-related uncertainty.
Although it is small in financial terms, it remains one of the UK’s best-known airline brands, carrying thousands of passengers between largely second-tier British airports as well as European destinations.
A source close to the company pointed out that it had warned in the results accompanying the launch of its sale process that if its credit card partners “were to choose to seek significantly higher cash collateral and the group cannot access sufficient additional liquidity, this would give rise to a material uncertainty which may cast significant doubt about the group’s ability to continue as a going concern”.
The Takeover Panel declined to comment, although a source close to it said it was confident its supervision of the bid had been handled in accordance with its policy of acting in investors’ interests.
For Virgin Atlantic, still part-owned by Sir Richard Branson’s Virgin Group, control of Flybe’s regional network will provide a valuable feed into its long-haul flights to international destinations.
Its return to the domestic UK aviation market will come four years after it announced the closure of Little Red, its previous attempt to make money from a notoriously difficult sector.
Rising oil prices and the weakening of sterling have put airlines under intense pressure, with a deepening industry price war accentuating the financial squeeze.
A Hosking Partners spokesman declined to comment on the contents of its letter, but said this weekend that investors were “entitled to transparency over precisely what has gone on to drastically reduce Flybe’s value”.
“The auction undertaken under the formal sale process has clearly not yielded a favourable outcome for all stakeholders, and it seems that the outcome has locked out any other bidder who may be able to provide a better solution for all of Flybe’s stakeholders.”