Crisis Volatility Threatens BA-Iberia Merger

The financial uncertainty shaking both British Airways and Spain's Iberia is delaying and could even ground the carriers' plans to merge, sources close to the deal and analysts have said.

Analysts say that volatile markets have made it almost impossible to value the two airlines, both are more focused on fighting the worst sector downturn in a generation, and a power struggle for control of Iberia's biggest shareholder has put the deal in jeopardy.

The Spanish airline said on Thursday it was unlikely to make a profit this year and would propose scrapping its 2008 dividend in the light of weak demand from Spaniards, sliding business traffic and general price pressure

An official at Spain's UGT union said on Thursday the Spanish flag carrier made a EUR100 million euro operating loss in the first two months of 2009.

Friday's edition of Spain's La Vanguardia newspaper cited sources close to Iberia as saying business was so uncertain at the moment that it made it practically impossible to move merger talks forward.

A Spanish source familiar with the matter said that if a deal was done, it was unlikely to be struck before Spaniards returned from their summer breaks in September.

"We are hearing that the merger could be delayed until after the summer," he said.

A spokesman for Iberia said only that "merger talks are ongoing".


While British Airways would be only too well aware of Iberia's pain, having suffered itself, news of Iberia's woes hands the advantage back to BA investors in how the new company is split, after months on the back foot.

BA has been dogged by a yawning pensions deficit and poor trading, having issued a profit warning and disclosing that operating losses would mount to around EUR150 million pounds in the current and past financial periods. "A further delay to reach a final agreement is very likely as the status quo of Iberia's bargaining power... might change significantly," brokerage BPI said in a note on Friday.

Based on purely market capitalization, BA's shares were performing so badly two months ago that Iberia briefly became the bigger airline. But since then BA has moved ahead, with a 59 percent share to Iberia's 41 percent based on Friday prices.

Market volatility in the companies' share prices, visibility on likely earnings in such a poor market and also the value of BA's pension deficit is so extreme it means valuing the two is almost impossible.

Moreover, analysts agree trading is so bad that both companies will be too pre-occupied trying to douse the economic firestorm to close the merger, even if crisis underscores the deal's very rationale.

A spokesman for BA reiterated the company's line that discussions were ongoing.

Timothy Rees, who manages the Halifax UK Equity Income fund which holds a stake in BA, said that he did not believe recent Iberia trading figures would have a major affect on the deal.

"The short term trading I assume has probably relatively little influence. Some of the wider strategic issues continue to be of more significance," he said.

"BA is perceived as the larger party. I think that was always the case. It may concentrate certain minds even more as to the merits of the deal or otherwise."

An internal power struggle within Iberia's biggest shareholder, Caja Madrid, is also a threat. Esperanza Aguirre, president of the regional government which controls the unlisted lender, is battling to unseat its chairman, Miguel Blesa.

"The picture of who is going to be running Caja Madrid will be totally unclear until late September because of the political situation. That immensely complicates the merger," said one trader in Madrid, who asked not to be named.

Caja Madrid is widely believed to have scuppered a 3.60 euros-a-share bid for Iberia from BA and private equity group TPG in 2007. Though it now seems in favour of a tie-up with British it has proved a particularly tough negotiator over the division of shares.

Geoff Van Klaveren, airlines analyst at Exane BNP Paribas in London, said BA would be looking for somewhere between 55 and 60 percent of the combined entity.

"I think if it was less than 55 it would be totally unacceptable to BA shareholders because while they recognize there is a pension deficit problem, this is the worst time to take a snapshot of the plan."

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