FRANKFURT - Deutsche Lufthansa AG is preparing to fly solo.
On Oct. 13, the German government plans to sell off its remaining 35.7% holding in the German airline in what will be Europe's largest airline stock offering. This comes a year after Deutsche Telekom's initial public offering late last year that raised about 20 billion deutsch marks ($13.3 billion) - a European record.
The Lufthansa offering will come as the DAX index of German blue-chip stocks is just 10% off its all-time high of 4,438.93, reached on July 31. Frankfurt and London offices of Dresdner Kleinwort Benson and SBC Warburg are the global coordinators on the deal.
The sale represents the final phase of the Lufthansa privatization begun in 1994, when the government cut its share of Lufthansa from 51% to the current 35.7%.
In December 1996, the government parked its 35.7% stake with the Kreditanstalt fuer Wiederaufbau, its own bank which is used for such transactions. Under the terms of the "pre-sale," the government booked the then-current value of the stock - about 2 billion marks - but still will scoop up profits from the public sale of the securities.
That arrangement is about to pay off big. During the past nine months, Lufthansa's shares have more than doubled in price to DM35.40 ($20) per share. As a result, the stock sale should fetch around 5 billion marks ($2.8 billion) - putting an extra 3 billion marks ($1.7 billion) in the government's yawning coffers.
That windfall will be especially welcomed as Germany struggles to meet a deficit target of 3% of gross domestic product to qualify for single European currency.
It's certainly a propitious time for Lufthansa. In August, the company announced its revenues grew by 9.1% to 10.7 billion marks ($6.05 billion) - the best performance in its history. Pre-tax profits totalled 397 million marks.
For one thing, Lufthansa has worked hard at grounding its notoriously high cost base.
Andrew Light, European airline analyst at Salmon Brothers, praises Lufthansa's methods for "doing smart things like outsourcing its high-cost regional and domestic routes."
But Lufthansa can also grow, according to Mr. Light: "It's well-placed to take advantage of growing Central European demand, which together with Latin America will be one of the two biggest growth areas." Mr. Light is looking for Lufthansa to head for a target price of DM43 ($24.29) per share.
Last November's mammoth privatization of Deutsche Telekom certainly will focus more interest on Lufthansa. Indeed, Telekom's ubiquitous advertising campaign, plugging the advantages of buying stocks, had a powerful effect both for the companies going public and the market itself.
In the first eight months of 1996, there were only four German IPOs in Germany. In comparison, 17 companies had gone public by the end of August this year.
And these IPOs finally have attracted retail investors. Officials at the Deutsche Aktien Institut (German Stock Institute), an association of listed companies, estimates that Telekom's IPO led some 500,000 new retail investors to buy stock.
Lufthansa officials also want to reach individual investors, and is promoting the sale as the "stock market experience of 1997." Individual investors will be offered a discount of "undetermined size on their shares," said Rolf-Dieter Grass, head of investor relations at Lufthansa.
Helmut Achatz of the Deutsche Aktien Institut, welcomes the discounting practice. These new retail investors have a "stabilizing force on the market because they tend to be very long-term-oriented."
Institutional investors, however, are not falling over themselves to buy the stock at its current price.
Michael O'Hara, European portfolio manager at Murray Johnstone Ltd., Glasgow, said: "Analysts are really talking it up. But Lufthansa is not one we'll be taking. .*.*. It's hard to justify buying a stock that's done as well as Lufthansa has, and frankly, we believe (the value is) in the price. But I do believe that if you own it already, then you'll be happy to stay with it."
Michael Schoeck, vice president, international equities at State Street Global Advisors in Boston, said: "It all depends on the price."
However, he's not going to buy either.
"Lufthansa will be very juicy for private investors because of the discounts they'll be offered, like with the Telekom IPO." He thinks the stock sale will be at a "slight discount to the current price, which will make it interesting."
"Privatization is good news for the company. That the state is relinquishing (its ownership stake) makes me very bullish. This means Lufthansa will be able to continue their cost-cutting measures," Mr. Schoeck added.