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. Last Updated: 07/27/2016

Aeroflot's Alitalia Bid Faces Uphill Struggle

ROME -- Aeroflot's surprise bid for Italy's flagship carrier Alitalia comes as the two countries forge closer ties, but will inevitably face political and business hurdles that could scupper the effort.

In a move that took markets and Italy's own transportation minister by surprise, Aeroflot emerged last week as a last-minute contender in Alitalia's auction, one of three bidders left in the fray.

In some ways, Aeroflot's interest in the carrier, which has a market capitalization of about 1.4 billion euros ($1.9 billion), could not have come at a more opportune time.

President Vladimir Putin wound up a visit to Italy last month with promises of greater business cooperation, especially in energy and aerospace, while Italian Prime Minister Romano Prodi has trumpeted Russia's entry into Italy's consumer market.

Analysts say the bid is in line with such political moves.

"In light of the recent relationship between Italy and Russia on gas and oil, it's not a negative to be Russian when it comes to bidding for Alitalia," said Alessandro Frigerio, a fund manager at Milan-based RMJ which holds Alitalia shares. "Italy today with this government is much closer to Russia than it is to [longtime ally] the United States."

Russia, flush with over $300 billion in foreign reserves, is looking to flex its muscle on the European stage, while Italy needs a buyer for an airline that loses over 1 million euros per day, has not reported an operating profit since 1998.

Rome has put a 39.9 percent stake in Alitalia up for sale, forcing any buyer to make a full bid. Smaller Italian rival Air One and a consortium including U.S. private equity group Texas Pacific are the other two groups left in the running, though none of the bidders have yet publicly said what they were prepared to offer.

But analysts say Aeroflot and Alitalia together would make an unwieldy pair, given their varied aircraft fleets, problems posed by different air travel rules governing non-EU countries like Russia and little overlap in operations.

Potential for cost savings would be limited given the few flights operated between Moscow and Italy's main cities, Milan and Rome, said Oliviero Baccelli, deputy director of Bocconi University's transport economics research center.

Italian bank UniCredit, which is backing Aeroflot's bid, has said a European airline could join them -- which analysts say could resolve some of the issues -- but did not name anyone.

A successful bid would give Aeroflot access to a wider network and the European market. But that could be negated by Alitalia's lack of profitability and difficult restructuring prospects, Deutsche UFG said.

"It is clear that Alitalia cannot be restructured simply by dismissing some of its 18,000 workers, as there may well be problems due to the strong unions and political interference," the bank said in a research note.

And despite the warmer ties, selling the national airline to a Russian carrier would sooner or later face political resistance over a sale to a foreign group, some analysts said.

"When a company goes abroad, political grip on that company goes away," said Nicolo Nunziata, analyst at J&C Associati. "It's not a question of prestige, it's a question of control."

Any sale to the Russian government will also inevitably bring up the question of how it is compatible with Rome's stated intention to free the airline from state control, Baccelli said.

"It makes no sense to sell a public Italian company to the Russian government," he said, "when your aim is to privatize the airline."