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The Deal: Air France-KLM Stalls Over New Alitalia Investment

NEW YORK (The Deal) -- Italy's government has invited Air France-KLM to increase its stake in struggling carrier Alitalia SpA but the Franco-Dutch airline isn't exactly jumping on board, insisting that it needs time and more information before making a decision.

Executives of Air France-KLM on Monday, Sept. 23, discussed increasing a 25% stake, as part of a planned fundraising by Alitalia, but postponed a decision ahead of a series of meetings that are likely to determine whether Europe's No. 3 airline by market capitalization will increase its stake to 50% or possibly abandon the Italian carrier.

"The board considered it vital to hear the information that Alitalia's executive management should provide at a forthcoming meeting of the Italian company's board of directors," Air France-KLM said. Alitalia's board and its advisers are due to meet on Thursday, Sept. 26, the same day that Italian and French transport ministers are scheduled to discuss Alitalia.

Alitalia wants to raise €300 million ($405 million) of new funds to pay operating costs and underwrite a restructuring plan that is targeting a return to profitability by 2016. Air France-KLM will have to take part in that fundraising if it is to maintain or increase its 25% stake, acquired in 2009 for €323 million after Italian politicians blocked a bid for a 49% stake.

Italy appears to favor a new investment by the Paris-based carrier. "I am waiting an increase in the role of Air France," Italy's Transport minister Maurizio Lupi said earlier this week. "I have no objections."

Air France-KLM's caution is understandable. Alitalia has failed to make a profit since it emerged from bankruptcy in January 2009 despite dismissing about half its workforce and abandoning a host of low profit and unprofitable routes. That retreat has allowed low cost airlines to grab domestic market share and Europe's No. 2 airline, Deutsche Lufthansa AG, to expand international flights into and out of Italy.

Rome-based Alitalia lost €157 million in the first quarter on sales of €729 million. It has net debt of €1.02 billion.

Its shares could be roiled by selling from October 28, when shareholders are released from a lockup period dating back to the carrier's bankruptcy. In February Alitalia tried to raise €150 million through a convertible bond sale but ended with just €95 million after some shareholders failed to support the fundraising.