UPDATE ON U.S. INVESTOR'S PLANS TO TAKE OVER FOR

C O N F I D E N T I A L SECTION 01 OF 02 ACCRA 001978

SIPDIS

E.O. 12958: DECL: 10/03/2009
TAGS: EAIR EINV GH
SUBJECT: UPDATE ON U.S. INVESTOR'S PLANS TO TAKE OVER FOR
GHANA AIR

REF: A. ACCRA 1786


B. ACCRA 1703

C. ACCRA 1683

D. ACCRA 1644

E. ACCRA 1583

F. ACCRA 1550

Classified By: Economic Chief Chris Landberg for Reasons 1.5 (B and D)

Summary
--------------

1. (C) Charge and EconChief met with Amcit representatives of
Ghana International Air (GIA) to discuss its agreement with
the Government of Ghana (GoG) to create a new airline to take
over Ghana Air's routes. GIA reps confirmed that the GoG and
GIA have agreed to form a partnership, with the GoG taking a
70 percent stake in the new company and GIA taking 30 percent
with full operational control. The GoG will be responsible
for Ghana Air's debt and employees. GIA will seek equity
investments to fund equipment purchases and aircraft leases.
It intends to take over Ghana Air's U.S., Europe and regional
routes early in 2005. The deal has generated much local
skepticism and opposition, including from the IMF and Ghana
Air's management. Post raised its own concerns during the
meeting. End Summary

GIA Reps Outline Deal with Government
--------------

2. (C) Charge and EconChief met September 24 with Kirk
Heaton, Executive Vice President of Sentry Financial
Corporation, which handles financial arrangements for GIA.
Heaton was in Ghana representing the U.S. investors behind
GIA, led by SkyWest Airline founder Ralph Atkin. GIA signed
a Letter of Intent with the GoG on September 1 to create an
airline company to take over the routes currently flown by
national air carrier Ghana Air (Note: see reftels for
background on Ghana Air. End Note). This new airline, to be
named later, will not take over Ghana Air, so will not have
responsibility for Ghana Air's employees or financial
liabilities.


3. (C) Under the Letter of Intent, the GoG agrees to wind
down Ghana Air in preparation for a hand off to a new airline
in early 2005. This will entail valuing Ghana Air's assets,
dealing with Ghana Air's employees, and assuming Ghana Air's
estimated USD 160 million debt.


4. (C) The GoG will initially own 70 percent of the new
airline. GIA will take a 30 percent stake, but will retain
full operational control. Heaton stated the GoG will have
seats on the board of directors, but will participate as a
"silent partner." Both sides agreed to put up an initial
investment of USD 7 million, split 70/30, as operating
capital.


5. (C) GIA is working to raise an additional USD 30 to 50
million from equity partners, targeting three types of
investors: 1) strategic partners, mainly other airlines; 2)
aircraft leasing companies; and 3) pure equity investors.
The outside equity will dilute the GoG and GIA's holdings,
lowering the GoG's stake below 50 percent. GoG Transport
Minister Richard Anane has discussed diluting GoG ownership
further by floating shares on the Ghana Stock Exchange.


6. (C) The GoG has "ring fenced" the USD 160 million debt,
and will handle all negotiations with creditors (Note: Post
has heard that up to two thirds of the debt is owed to GoG or
quasi-GoG institutions, and only about USD 70 million is owed
to outside creditors. End Note). The GoG has agreed to lay
off Ghana Air's estimated 1200 to 1600 employees. GIA will
poach Ghana Air's best employees, including most of its
pilots, and its goal is to operate Ghana Air's routes with
fewer than 250 employees.


7. (C) GIA has also agreed to "consider" purchasing some of
Ghana Air's assets from the GoG. Given that Ghana Air is
flying all its routes with leased aircraft, its assets are
likely to have minimal value. The GoG has stated it will
liquidate the assets that GIA does not want.

Timeline
--------------

8. (C) GIA is coordinating with Ghana Civil Aviation
Authority (GCAA) to register and certify the new airline.
Heaton said GIA would submit the appropriate application to
GCAA within 60-90 days and estimated the GCAA would take two
months to approve it. GIA will use this period to raise the
equity, hire employees, train pilots, and lease six Boeing
aircraft (two each for the U.S., Europe, and regional
routes). After a few years of operations, GIA will approach
OPIC and ExImBank for assistance with a second round of
financing to expand the fleet. GIA will immediately seek to
establish linkages and join alliances with other airlines,
with the goal of making the new airline the company of choice
to partner with for flights to Africa.

Local Reaction
--------------

9. (C) Post has found few supporters of this deal outside
government. There are allegations of lack of transparency in
the bidding process. KLM, which bid on the deal but dropped
out, argues that the Transport Ministry did not specify that
the GoG would assume Ghana Air's USD 160 million debt. Ex
Ghana Air CEO, Philip Owusu, alleges that GIA has "secret"
Ghanaian partners, who are the true force behind this deal.
He claims that only GIA knew the GoG would assume the debt,
so the deal was fixed from the start.


10. (C) Other local observers, especially in the media, argue
that GIA does not have the capacity or financial wherewithal
to build a strong Ghanaian airline. A frequently heard
criticism is that the GoG should have chosen an established
airline to save Ghana Air. Ghana Air's current management
argues this, and lobbied President Kufuor to oppose the GIA
deal and instead support a Ghana Air partnership with
Ethiopia Air.


11. (C) IMF Resident Representative Alpha Muttardi also
opposes the arrangement, and has lobbied the GoG to drop the
deal. She told EconChief that GoG assumption of the debt
could undermine the IMF program. Heaton claims President
Kufuor personally intervened to conclude the deal with GIA,
so the IMF's lobbying may have little effect.

Comment
--------------

12. (C) Charge and EconChief urged Heaton and GIA investors
to research the problems other investors have experienced in
Ghana. Most recent disputes with the GoG resulted at least
in part because the investors did not adequately document the
division of rights and obligations with the GoG. This may
become a problem with the current deal. GIA decided to sign
a letter of intent with the GoG, rather than signing an
agreement that would require Parliamentary approval.
Although GIA did this on purpose to avoid Parliamentary
delays, an approved agreement would provide more security to
the investors. GIA's tentative agreement to consider buying
Ghana Air assets may also ultimately be problematic. GoG
officials consider verbal assurances tantamount to
obligations, and have created obstacles to investors who
failed to follow through on the purchase of local equipment.


13. (C) GIA is following the old model of working directly
with the President, and is keeping its intentions (and
identity of its investors) close-hold. However, Ghana Air is
one of the more controversial subjects in Ghana, and as
Kaiser Aluminum has discovered a deal with the President does
not protect you from the other powerful forces in this
increasingly decentralized democracy. Cabinet Ministers,
Parliamentarians, bureaucrats and private parties are
increasingly influential, and GIA's many opponents may be
waiting for their opportunity to undercut the new airline.


14. (C) EconChief alerted Heaton of the impending FAA
reassessment of civil aviation safety oversight, which could
result in a downgrade to Category Two. Heaton said he was
well aware of the upcoming FAA visit and has offered
technical assistance to the GoG and GCAA to help them retain
Category One. End Comment

LANIER