Arkia Talking to Other Buyers as El Al's Exclusivity Ends

June 28, 2022
The merger is still being examined by El Al but sources say Arkia is talking to alternative buyers on taking over the company and replacing the current controlling shareholders.

Jun. 27—The merger deal between El Al Israel Airlines (TASE: ELAL) and Arkia Israeli Airlines is getting further away. The merger is still being examined by El Al, as the company stated in a notification to the Tel Aviv Stock Exchange today, but sources inform "Globes" that Arkia is talking to alternative buyers on taking over the company and replacing the current controlling shareholders, brothers Joe, Raffi and Avi Nakash, who hold 70% of the shares in the company. The remaining 30% are held by Arkia's employees.

Up to now, Arkia has been barred from negotiating with other buyers by the exclusivity it gave to El Al. The period of exclusivity ends on June 29, and Arkia does not wish to extend it. Potential buyers can now obtain details about the company and start a due diligence process while negotiating. Another possibility that Arkia is examining is a public offering, like that of rival airline Israir, which recently raised NIS 25 million at a valuation of NIS 250 million.

Arkia employs some 400 people. It owns five aircraft, and operates two to four additional aircraft through short- and long-term wet-leasing (that is, with the crews of another airline). Arkia flies to overseas destinations and operates a domestic service to Eilat. In May this year, the airline flew 50,000 passengers on overseas routes (3% of total passenger traffic at Tel Aviv's Ben Gurion Airport). On its routes to Eilat, which are considered profitable, Arkia flew 40,000 passengers (65% of the traffic on the route, which it shares with Israir).

Employees opposed

Arkia's employees adamantly opposed the merger deal with El Al, claiming that the company would be harmed by it, if only in that flights on Saturdays would be stopped. Officially, Arkia is the only one of the three Israeli airlines that operates on Saturdays.

In El Al's notification to the Tel Aviv Stock Exchange today, the company states, "The company intends to continue to conduct negotiations with Arkia even without the exclusivity clause, but it is unable to estimate when the deal will be completed (if at all), and, if it is completed, what the terms of it will be, as compared with the memorandum of understanding."

The initial memorandum of understanding stated that Arkia would be merged into El Al, and in return Arkia's shareholders would be allocated 10% of the shares in El Al and 10% of the options allocated by El Al after the share allocation. It also stated that Arkia, which would be valued at NIS 85-120 million in the deal, would operate as a separate brand. El Al said at the time that the advantage of the merger would lie in expansion of ground services and vacation package deals.

In order for the deal to progress, consent is required from Arkia's employees, who, as mentioned, oppose it, describing it as "a severe threat to Arkia's existence", and saying that the merge will be between a healthy company and a sick one. Arkia's employees recently even filed a derivative action against the airline's chairperson, Gadi Tepper, claiming that an attractive leasing deal on Airbus planes that could have benefitted the company had been undermined.

Arkia stated in response: "Arkia is a private company that continues to conduct negotiations for the sake of its development."

Published by Globes, Israel business news — — on June 27, 2022.

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