The proposed merger of British Airways and Iberia are threatened, and may be heading for the rocks, after the UK carrier warned it was not prepared to merge with its Spanish counterpart on the basis of current market valuations for the airlines.
Thanks to good performance by Iberia shares, poor performance by British Airways shares, and the sharp decline of the British Pound against the Euro, the market value of Iberia on Thursday exceeded that of British Airways for the first time since the carriers began merger negotiations in July 2008, to form Europe’s third largest airline behind Air France-KLM and Lufthansa-Swiss-Austrian-Brussels.
When the merger talks between the two began at the end of July, the respective market capitalisations indicated a share exchange ratio of 65 per cent for BA and 35 per cent for Iberia. The ratio has plunged to only 49.6 per cent for BA and 50.4 per cent for Iberia.
During a visit to Hyderabad, BA CEO, Willie Walsh said
The present valuation was unacceptable. Our shareholders would not accept it; The Iberia share price had “performed well in recent times”, I would argue it is overpriced. We will look at this in the negotiations. That work is still to be done. I am not at all concerned about not doing a deal with Iberia. I would walk away if it does not make sense.
Bangalore Aviation readers will recall that valuation disagreement, was a dominating reason for the recent collapse of merger talks between British Airways and QANTAS.
The rising deficits in BA’s pension scheme is also a cause of concern for Iberia, and it is due to receive a report by financial consultants, Mercer, by the end of the month.
Iberia executives are realistic, and acknowledge that the recent shifts in market valuation are not reflective of the true values, of the two airlines, but simplest corporate governance demands them to take fullest advantage of the situation, and get a good deal.
The talk from Willie Walsh may be tough, but British Airways is in a tight spot. It is rapidly falling behind in the airline consolidation race; a crucial strategy during these bleakest of times. Their anti-trust waiver requests with American Airlines, are far from through, and if the merger with Iberia fails, I do not see many available options for them.