EFTA01385538.pdf

> BLT Deutsche Bank ED Deutsche Lufthansa — Anand Date, BUY, close €30.7, €36.2 tgt, 18% upside ■ The Air Berlin acquisition is an excellent deal. >50% of Air Berlin flown Combined AB + LHA has over half its capacity on routes with >80% share capacity on routes where Lufthansa + Air Berlin would have combined 80- 100% market share, creating capacity and revenue management 35.000.000 opportunities. 29.589.352 978.907 30:000,000 4,027.540 1.490.576 - The combined group would have a number of strong positions at 25.000.000 6,445,393 severely and slightly constrained airports. Our August 2017 note 20,000,000 16,646,936 ("Finding a sweet slot") highlighted the benefits of such positions, in 15.000.000 terms of network flexibility, better pricing power and tangible slot value. 10.000.000 ■ Airline M&A has historically been highly accretive, generally yielding 5,000.000 synergies of 3-7% of combined revenues (3/4 revenue, 1/4 cost). 0 ■ Lufthansa is not inheriting legacy costs, only purchasing assets at Total Seats 80-100% 60-80% 40.60% 20.40% 0-20% (AS+LHA) (AB+LHA) CAB+LHA) (AB+LFtA) (AB-)LHA) market rates. It has guided that the deal should reduce unit costs. and share mkt share mkt share mkt share mkt share Source: Deutsche Bank. Dio M ■ We see a ROCE of 25-35% on a three year view based on a E1.5bn investment in the deal. ■ The market is not reflecting this in forecasts. We forecast incremental Airline M&A has historically yielded material synergies EBIT of €470m by 2019, leaving us 22% ahead of consensus. ■ Antitrust risk is limited: 1) Lufthansa is providing much of Air Berlin bridge Date Acquirer Candidate Total Synergies % of Revenue financing; 2) EC did not block the Lufthansa-Swiss Air deal despite similar Sep 2010 Southwest / AirTran US$400 million 3% local market dominance Aug 2010 LAN / TAMa US$400 millionb 4% May 2010 UAL / Continentala US$1.2 billion 4% ■ Shares should trade up on earnings growth and consensus revisions. Currently trades on 6.5x 1yr fwd P/E. With 5% and 18% adjusted EBIT Nov 2009 British Airways / Iberian US$600 million0 3% growth in 18E/19E, we see consensus upgrades as likely as the deal is Apr 2008 Delta / Northwesta USS2.0 billion 6% priced in. Apr 2005 America West / US Airways US$680 million 7% N8: Unless notes, all above synergy totals reflect an annual run rate and were especled to be achieved by year three Related DB Research: following transaction dose. (a) Transaden structured as a merger of equals. (b) In early 2012. LAN and TAM revised (hair synergy forecast to $600 • $700 million beginning four years after completer, of the transaction and represemling 4.5% • 5.0% of LTM Lufthansa: AB Fab. Upgrade to BUY (Date) combined revenue. (c) Al the time of the announcement. BA and Iberia identified €400 million of annual synergies (after five years) Transportation Outlook 2018: Going Places (Chu' vAlid, we converted to US$ at the Nee of the announcement. Source: Deutsche Bank. Company Data Deutsche Bank Research• European Equity Focus - Jaraary 2016 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0086824 CONFIDENTIAL SDNY_GM_00233008 EFTA01385538