British Airways, Iberia agree to $7 bn merger

British Airways investors will own about 55% of the business

British Airways Plc agreed to a $7 billion merger with Spanish carrier Iberia Lineas Aereas de Espana SA, ending more than a year of talks on a tie-up aimed at fighting a slump in travel and closing the gap with competitors.

Under the all-share deal, British Airways investors will own about 55 per cent of the business, to be led by Willie Walsh, the UK carrier’s chief executive, the companies said. The merger won’t be completed until late 2010 and can be called off by Iberia if BA fails to resolve pension-deficit issues.

British Airways needs a bigger network to compete with larger rivals Air France-KLM Group and Deutsche Lufthansa AG. The combination will meld the UK company’s web of US routes with Iberia’s Latin America services, extending its leading position in the lucrative trans-Atlantic market and consolidating its status as Europe’s third-largest airline.

“BA and Iberia will be stronger together than they are alone, particularly in terms of their networks,” said Gert Zonneveld, an analyst at Panmure Gordon in London with a “hold” rating on British Airways. “The pension deficit shouldn’t be an obstacle to this because it’s built into the share price.”

According to a memorandum of understanding signed by the companies, British Airways investors will get one share in the combined entity for every existing share they hold and Iberia investors will get 1.0205 shares for each Iberia share.

The two carriers will continue as separate brands and operating divisions under a holding company registered in Madrid but with its main offices and primary stock-exchange listing in London. Iberia Chairman Antonio Vazquez will hold the same post at the new business, according to a statement released after markets closed.

British Airways rose as much as 5.6 per cent to 227.1 pence and was up 1.6 per cent at 218.4 pence as of 10:32 am in London, valuing it at 2.52 billion pounds ($4.2 billion). Iberia added 5 per cent before trading down 1 per cent at 2.20 euros for a value of 2.09 billion euros ($3.11 billion).

Shares of the Spanish carrier jumped 12 per cent and BA added 7.5 per cent after the pair said that their boards were meeting to approve a deal.

The companies said “there is a compelling strategic rationale for the transaction,” which will create a carrier with 15 billion euros in sales and 62 million passengers based on 2008 figures. It will have 419 aircraft serving 205 cities.

The deal will cost 350 million euros and generate synergies of 400 million euros by fifth year, they said, two-thirds from combining computer, fleet, maintenance and back-office functions and the rest from revenue gains from joint selling.

An unspecified number of jobs will be cut as part of the combination, BA chief Walsh said in a Bloomberg Television interview, adding that the merger is a vital step in his carrier’s efforts to catch up with Air France and Lufthansa.

“The concern was that our big competitors have been involved in that process for a number of years and the risk to us was that we were getting left behind,” Walsh said.

The agreement is subject to shareholder approval and may be terminated “if the outcome of the discussions between British Airways and its pension trustees is not, in Iberia’s reasonable opinion, satisfactory.”