Late last week, AirBerlin announced (more or less directly), among other stuff, that they plan to completely delist and transform themselves into a non traded “limited liability” company.

AirBerlin is a struggling regional German Airline, where Etihad, the Arabian airline has currently a 29% stake. Ethihad seems to be eager to increase their share to slightly below 50%, above that Airberlin would be at risk to lose valuable Airport slots etc. as they would not be considered a German/European airline anymore.

Normally, if you cross the threshold of 30%, you have to make a bid to all shareholders, usually related to an average price over the last 30 (or 0 ?) days or so.

In this case, the plan seems to be different. Ethihad and the management seem to want to take Airberlin private. In this case the tactic seem to be to scare investors away by delisting the shares and transform then into non-tradable stakes first, and then most likely come with a lowball bid for the remaining shareholders.

Looking at the stock chart, we can see that Air Berlins stock has been struggling anyway for a long time:

Funnily, the stock chart jumped shortly when the news came out but then went back down again rather quickly.

Why is this possible and where is the problem ?

Why did I say in the headline that this is bad news for stocks and ist shareholders ? Well, first of all, delisting a stock is definitely not a good thing for shareholders, all other things equal. Not being able to trade via an exchange means very limited liquidity. Limited liquidity or no liquidity means that holders either will require a higher discount to fair value or, as many funds etc. are not even be allowed to hold the stock and are forced to sell.

While this is a bad thing for existing shareholders, it is of course a good thing for a strategic investor, who does not need any liquidity in his position and wants to buy cheap. So “conspiring” with management in order to delist a company and drive down the acquisition price would be a very obvious strategy to take over companies cheaply.

In order to avoid this and protect especially small shareholders, there are usually regulations to prevent this. One case where I was directly involved last year for instance was EGIS, the Hungarian pharmaceutical company. There, the majority owner also threatened to take the company private in order to “motivate” small shareholders. But in Hungary, he would have needed at least 90% of the shareholder vote in order to do so. So he had to make a somehow fair offer at first before then being able to add his “going private” thread. This makes a huge difference.

So why the hell is this so easy in Germany ?

My guess is that this is a first test balloon, following to court decisions in Germany.

First, in 2012, the highest German court, the “Bundesverfassungsgericht” said that the listing of a share is not explicitly protected by the German constitution. As a result of this, late last year, the highest Civil court then decided in October 2013, a delisting can be decided without asking shareholders by the management of the company alone.

Until now, based on the so-called “Macrotron case”, companies had to offer a fair-value based cash compensation if the wanted to delist from the stock exchange.

I am not a lawyer, but in general this decision has clearly negatively impacted the right of minority shareholders. I do not know which are the possibilities to fight against those delistings, but it seems that it has become much harder and more difficult. So going back to the EGIS example: Minority shareholders in Hungary are much better protected against this as German shareholders.

Of course this is great news for M&A advisors, private equity funds or dominant shareholders etc., because it makes it easier to buy companies and kick out small shareholders at a low price.

On the other hand, in the long run, valuation levels for markets almost always reflect the rights of shareholders, especially minorities. If there are no rights (see Russia) than stocks will trade at a discount.

For me, this is a reason more to stay away from the rather expensive German stocks, especially if they have dominant shareholders who want to have the whole company cheaply.

If the AirBerlin case would be the blueprint for similar deals to come, this would be very negative for the valuations of similar German companies. One might even think about developing a short strategy for likely candidates. And yes, squeeze out speculations do not look so attractive anymore.