British Airways plc (BAY.L, BAIRY.PK) and Spanish airline Iberia Lineas Aereas de Espana SA (IBRLF.PK) said Thursday that they have agreed to merge in an all-share deal, ending more than a year of negotiations. The boards of the two companies have agreed on a binding memorandum of understanding, or MoU, for the creation of a new airline, with annual revenue of about Euro 15 billion and that will be able to better compete with rivals like Air-France KLM Group (AFRAF.PK) and Deutsche Lufthansa AG (DLAKY.PK).
The proposed merger will result in the creation of a new holding company, TopCo, that will own both the existing airlines and whose shareholders will be the current shareholders of British Airways and Iberia. Under the terms of the proposed merger, British Airways' shareholders will receive one new ordinary share in the combined company for every existing ordinary share they hold in British Airways, while Iberia shareholders will receive 1.0205 new ordinary shares for every existing ordinary share they hold in Iberia.
On the basis of this exchange ratio, shareholders of British Airways shareholders will hold 55% of the combined company, while Iberia shareholders will hold 45%. The companies expect the signing of a definitive merger agreement to occur in the first quarter of 2010, while the merger is expected to be completed in late 2010.
In a joint statement, the companies said, "The airlines believe there is a compelling strategic rationale for the transaction, which is expected to generate annual synergies of approximately 400 million euros, and benefit both companies' shareholders, customers and employees."
The combined company will be a Spanish incorporated company registered in Madrid, Spain. The operating and financial headquarters of the combined group will be located in London, which shall contain the principal management functions of the combined group.
The merged company's board will comprise fourteen directors with seven designated by each airline. The combined business will be led by the group CEO, Willie Walsh, currently the CEO of British Airways. Current Iberia chairman Antonio Vázquez will be group chairman, and British Airways chairman Martin Broughton will be deputy group chairman.
The combination of British Airways and Iberia would have 419 aircraft and fly to 205 destinations. The new group will combine the two airlines' leading positions in the U.K. and Spain, and enhance their presence in the international longhaul markets. Both British Airways and Iberia will retain the individual brands and current operations of each airline.
In 2008, British and Iberia together carried 62 million passengers. According to their latest financial year, their joint revenues are of approximately Euro 15 billion.
Customers of British Airways will gain access to up to 59 new destinations, of which 13 will be in Latin America, while Iberia's customers will gain up to 98 new destinations across the British Airways network.
The companies expect annual synergies of approximately Euro 400 million at budgeted exchange rates by the end of the fifth year after the completion of the merger at a cash cost of up to Euro 350 million.
British Airways and Iberia expect to present the transaction for shareholder approval at the latest in early November 2010, with completion expected to occur approximately one month following such approval.
Commenting on the deal, Antonio Vázquez, Chairman and CEO of Iberia, said "It has been a long process where many people, both at British Airways and Iberia, have worked very hard to reach this agreement. But in the end it was worth it. This agreement is a giant step in the history of both Iberia and British Airways."
Willie Walsh, Chief Executive of British Airways, said, "The merger will create a strong European airline well able to compete in the 21st century. Both airlines will retain their brands and heritage while achieving significant synergies as a combined force."
Iberia said it will be entitled to terminate the merger agreement if the outcome of the discussions between British Airways and its pension trustees is not, in Iberia's reasonable opinion, satisfactory because it is materially detrimental to the economic premises of the proposed merger. Under the terms of the MOU, the parties have agreed that a break fee of Euro 20 million will be paid in certain circumstances.
Both British Airways and Iberia have been in merger discussions since last July as they grappled with the worst crisis in global aviation in years. The International Air Transport Association, or IATA, in mid-September announced a revised global financial forecast, predicting airline losses totaling $11 billion in 2009. This is $2 billion worse than the previously projected $9 billion loss due to rising fuel prices and exceptionally weak yields. Industry revenues for the year are expected to fall 15% to US$455 billion compared with the prior year levels.
A sharp drop in passenger numbers during the recession forced airlines to consider mergers or alliances to share profits and coordinate their route systems.
However, British Airways' talks with Iberia nearly came to a stand still earlier this year over the issue of British Airways' hopes of a 65-35 split in its favor, for which Iberia was not in agreement with. Another issue was British Airways' pension fund deficit, which stood at GBP 3 billion when the carrier's fiscal year ended in March. Iberia said Thursday that neither the company or the combined company will provide any guarantee or use any cash or credit facilities to fund the British Airways' pension scheme.
The deal comes amid a wave of consolidation among European carriers in recent years. In the past year, Deutsche Lufthansa AG has taken over or acquired stakes in Brussels Airlines NV, BMI British Midland Airlines Ltd and Austrian Airlines AG. Meanwhile, Franco-Dutch Air France-KLM SA has taken a 25% stake in Italian airline Alitalia SpA. For British Airways, the combination with Iberia comes after its tie-up with Qantas Airways Ltd. (QUBSF.PK), Australia's largest airline, collapsed in December 2009 after the two companies failed to agree on the division of control in the partnership.
UBS is acting as financial adviser to British Airways on the deal, while Morgan Stanley is acting as financial adviser to Iberia. In early November, British Airways reported a pre-tax loss for the first-half ended September 30, as the recessionary environment continued to hurt traffic and drove down revenues by nearly 14%. Pre-tax loss for the half-year was GBP 292 million, compared with a pre-tax profit of GBP 52 million in the previous year. Loss attributable to equity holders of the parent company widened to GBP 217 million or 18.8 pence per share from GBP 49 million or 4.3 pence per share in the same period last year. Half-yearly revenues were GBP 4.10 billion, down 13.7% from GBP 4.75 billion in the prior year. On the London Stock Exchange, BAY.L closed Thursday's regular trading session at 215.00 pence, up 15.00 pence or 7.50% on a volume of 45.71 million shares. In the past 52 weeks, the stock has been trading in a range of 111.30-243.30 pence.
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