Ryanair suffers double setback in Aer Lingus bid

A passenger jet belonging to airline Ryanair is seen taking off from Charleroi airport, in southern Belgium in this February 2, 2004 file photograph.

DUBLIN (Reuters) - Ryanair suffered a double blow in its bid for Aer Lingus on Friday as the target's chairman said he would seek a "white knight" investor to defeat the approach and regulators blocked parts of Ryanair's offer.

Aer Lingus (AERL.I) Chairman Colm Barrington was quoted in a newspaper interview saying he would seek a friendly investor to take a majority stake in the airline and stave off Ryanair's 750 million euro ($989.3 million) bid.

"If they don't get us this time around, they won't get us again because I am not going to stay as chairman for three years and have this hanging over me," Barrington told the Irish Times.

His comments came as Ireland's Takeover Panel ruled out elements of Ryanair's offer, saying sweeteners included in its initial proposals could breach takeover rules by favouring one shareholder, namely the government.

Barrington said he had not identified a perfect partner for Aer Lingus, but said from a consumer and a national point of view Air France KLM (AIRF.PA) "would be a better option than Ryanair." Air France KLM declined comment.

Aer Lingus's board has rejected Ryanair's (RYA.I) all-cash bid of 1.40 euros a share, arguing it significantly undervalued the airline.

The Takeover Panel said Ryanair's pledges to give the state control over Aer Lingus's valuable landing slots at London Heathrow, and to provide bank guarantees to cut the carrier's fares and abolish fuel surcharges, would favor the government.

"Consequently, the panel has given a direction ... to Ryanair prohibiting it from extending these undertakings," the Takeover Panel said in a statement.

The panel also said Ryanair should drop promises to recognize trade unions at Aer Lingus and restore flights between Shannon in the west of Ireland and Heathrow -- unless it can clarify to whom the pledges have been made and that they meet takeover rules.

WAVE OF CONSOLIDATION

Unions, who are not recognized at Ryanair, have rejected the guarantees and remain concerned over job prospects.

Europe's biggest budget airline tried to buy Aer Lingus for double the price of its current bid in 2006, but was thwarted by an EU ruling that it would create a near monopoly in European flights out of Dublin.

Yet Aer Lingus's campaign to remain independent could be a hard sell when small airlines are being gobbled up across Europe.

Analysts say the wave of consolidation could give Ryanair a greater chance of success in getting its offer past European competition authorities. But Barrington, who was appointed chairman in September, was not convinced.

"Airline consolidation is bit like sex, there's more talk about it than actually takes place," he said.

Aer Lingus announced a job-cutting deal with unions and a pay freeze which it said would deliver 50 million euros in savings. Before it secured the deal it had said it would report an operating loss next year.

Barrington did not rule out a link-up with a private equity group. "It could be a short-term solution for independence, but private equity can be fickle too," he said.

Barrington, who knows Ryanair Chief Executive Michael O'leary from their days working for the airline's founder Tony Ryan, said Aer Lingus would also consider issuing shares to dilute its rival's near 30 percent shareholding.

Ryanair has tried to appeal directly to the government and employees, holders of more than 25 percent and 14 percent of the former state carrier.

Aer Lingus shares were trading 0.8 percent lower at 1.48 euros in London by 1556 GMT (10:56 a.m. EST), while Ryanair's shares dropped 2.2 percent to 2.95 euros.

(Additional reporting by Paris bureau; Editing by David Holmes)