KLM may use private equity to bid for Go

KLM, the Dutch flag carrier is considering mounting a joint bid with a private equity group to take over Go, the low cost airline subsidiary of British Airways.

BA, which is being advised by Goldman Sachs, is hoping this week to select its preferred bidder for exclusive negotiations with the aim of completing next month. Among the five short-listed bidders, the two private equity groups Electra Partners and Barclays Private Equity are understood to have teamed up and submitted a joint bid.

Electra had been approached by Candover, another private equity firm, but decided to mount the bid with Barclays.

Rival offers are understood to have come from 3i, the venture capital group, and from a European-based travel and leisure group. BA is hoping to secure a deal valuing Go at about £100m ($145m) but analysts suggest bids are more likely to be in the £70m to £90m range.

Among the private equity groups, 3i has been involved in the airline sector with its highly successful investment in 1991 in CityFlyer Express, which operated as a BA franchisee and was taken over by BA for £75m in late 1999.

Barclays Private Equity holds part of two Barclays funds’ controlling stake in London Luton Airport Operations, which has the 30-year operating concession for Luton airport. The airport has been involved in a long-running dispute over landing charges with EasyJet, a rival to Go in the low-cost airline sector.

KLM has reached a strategic crossroads with its involvement in the fast- growing but highly competitive low-cost sector.

It started its own low-cost operation, Buzz, at the beginning of last year competing with Go and Ryanair at Stansted airport. It is understood KLM has concluded that Buzz, which is still lossmaking, is too small, however, to compete with bigger rivals.

It is considering increasing its involvement in the sector by taking over Go to combine it with its Buzz operation to achieve the necessary size.

The alternative is to follow BA’s example by abandoning its low-cost experiment and trying to find a buyer for Buzz or another way of using its assets.

In contrast to BA’s experience with Go, which ended up cannibalising part of BA’s mainline traffic, KLM has avoided competing with itself through Buzz. The two brands have been kept further apart.