BA and Iberia agree merger - Deal creates Europe’s third-largest airline by revenue

BA and Iberia agree merger - Deal creates Europe’s third-largest airline by revenue
By Pilita Clark in London and Mark Mulligan in Madrid
Copyright The Financial Times Limited 2009
Published: November 12 2009 12:02 | Last updated: November 13 2009 09:02
http://www.ft.com/cms/s/0/ee333056-cf7f-11de-b876-00144feabdc0.html


British Airways and Iberia on Thursday night agreed the terms of a merger to create Europe’s third-largest airline by revenue, one of the biggest deals in the global aviation industry.

But the two airlines have agreed that Iberia will be able to terminate the accord if it is unhappy with BA’s handling of its swollen pension scheme, which has been one of the sticking points in the deal, first announced in July last year.

Investors in BA will have 55 per cent of the combined group – yet to be named – and Iberia’s shareholders will have the remaining 45 per cent.

Group’s headquarters will be in London and Willie Walsh, BA’s chief executive, will stay in the top job. Antonio Vázquez, Iberia’s chairman, will become chairman of the merged group.

“The merger will create a strong European airline well able to compete in the 21st century,” Mr Walsh said. “Both airlines will retain their brands and heritage while achieving significant synergies as a combined force.”

Speaking on BBC radio, Mr Walsh said: “Consolidation is happening in our industry and it is critical that BA starts participating in that.”

A new holding company will own both airlines and be tax-resident in Spain, where it will be registered as a company. Both airlines will maintain separate corporate structures so as not to jeopardise international traffic rights. The new company is so far known only as “TopCo”. “We may come up with something catchier than that,” said Mr Walsh.

He said the deal, which is not due to be fully completed until late next year, would create €400m ($594m, £358m) in synergies by the fifth year of the merger, two-thirds of which would be derived from cost reductions in areas such as IT, fleet maintenance and back office functions.

“There will be potential job reductions in both organisations,” he said, adding these were not being quantified at this stage. He told the BBC that the airlines would retain their brand identities but added: “Over time we wil take the best of the two.”

Iberia will be entitled to terminate the merger if the Spanish airline deems the outcome of discussions between BA and its pension trustees is “materially detrimental to the economic premises of the proposed merger”. BA’s pension scheme liabilities have reached more than £2.66bn, according to the latest reported figures.

Mr Walsh said the agreement did not refer to the size of the pension deficit, but to the “recovery plan” to be agreed between BA and the pension trustees.

Neither Iberia nor the new holding company will provide any cash or guarantee to fund the schemes. Asked what would happen if the UK operating company could not afford to fund a deficit that grew out of control, Mr Walsh said this was “totally hypothetical” and would not affect the merger ratio.

BA shareholders will receive one new ordinary share in the new holding company for every existing BA ordinary share held by them. Iberia shareholders will receive 1.0205 new ordinary shares for every existing Iberia ordinary share they hold.

Only Germany’s Lufthansa and Air France-KLM would be larger in Europe than the proposed group.

It would have 419 aircraft and fly to 205 destinations. In 2008, BA and Iberia carried 62m passengers and, in their last financial years, their joint revenues were approximately €15bn.

Shares in Iberia opened up 4.2 per cent in Madrid on Friday after closing 11.8 per cent higher at €2.22 on Thursday. BA shares topped the gainers on the FTSE 100 leaderboard, up a further 5.6 per cent to 227p, after a 7.5 per cent gain on Thursday.