UK regional carrier Flybe has told shareholders it had to sell off its operating companies, or face administration, adding that the empty holding company will wind up if shareholders do not back Connect Airways’ takeover offer.

Flybe is being acquired by Connect Airways, an acquisition vehicle owned by Virgin Atlantic, Stobart Group and Cyrus Capital. Under that deal, Connect Airways will acquire Flybe’s operating subsidiaries, without a shareholder vote. This will be followed by the acquisition of Flybe’s holding company, which requires shareholder approval.

The structuring of the deal has attracted the ire of Hosking Partners, which manages 18.72% of Flybe’s shares on behalf of several investors. They are demanding answers on why an offer of £0.01 ($0.013) per share was recommended, at a time when the company was trading at £0.16 per share, and after Flybe rejected an offer of over £0.40 from Stobart last year.

On Feb. 8, Flybe released formal details of the holding-company takeover offer to shareholders. The Exeter-based airline recapped the history behind the sale, saying it had been hard-hit by fuel and foreign exchange prices, coupled with pressure from credit card acquirers. If the card acquirers had put further pressure on Flybe’s liquidity, it would have jeopardized the airline’s ability to continue as a going concern.

This situation meant that, in November, Flybe announced it was up for sale, triggering a number of expressions of interest for the whole company, parts of the business and specific assets. As part of the sale process, Flybe moved to a standard stock-market listing, as approved by the airline’s shareholders in December. This standard listing made it easier to sell off assets to generate cash.

The Connect Airways bid for Flybe Group, which included a £20 million ($26 million) credit facility, was picked from a small shortlist. “Although the price per share offered by Connect Airways was disappointingly low, its proposal was ultimately the only proposal capable of immediate execution to enable Flybe and the Flybe subsidiaries to continue to trade as going concerns,” Flybe said in its Feb. 8 summary.

However, the credit card acquirers were not willing to wait until the sale completed, so Flybe had to draw on the Connect Airways funding in mid-January.

“In the time available, there were no other parties in a position to meet both Flybe’s funding needs and the requirements of Flybe’s banks and credit card acquirers. The Flybe directors concluded, and were so advised, that the only way to avoid [operating companies] Flybe and Flybe Limited having to be placed into administration was to enter into a new agreement to sell Flybe’s operating subsidiaries to Connect Airways, thereby preserving the interests of Flybe shareholders and stakeholders, including customers, employees, pension scheme members and other creditors,” Flybe said.

This gave Flybe immediate access to a £10 million bridge facility and helped stabilize relations with the credit card acquirers and banks. Flybe’s shareholders did not get to vote on the sale of Flybe’s operating subsidiaries, because of the earlier move to a standard listing.

Connect Airways offered Flybe Group £2.8 million for the operating subsidiaries, but none of this is payable to shareholders. Instead, the £2.8 million will be used to cover costs. However, Connect Airways still plans to acquire the holding company—a non-trading entity with no subsidiaries or material assets—for the original offer of £0.01 per share.

“Following completion of the subsidiary sale, if the scheme [holding company sale] is not approved, the Flybe directors intend to take steps to wind-up the company, and shareholders are likely to receive no value for their shares in Flybe. Accordingly, the Flybe directors believe that the terms of the acquisition remain in the best interests of Flybe shareholders as a whole and unanimously recommend that Flybe shareholders vote in favor of the resolutions to be proposed at the court meeting and the general meeting,” Flybe said.

These meetings will take place in London on March 4, after the planned Feb. 22 completion date for the sale of the operating subsidiaries.

Victoria Moores