British Airways (BA) and Iberia have signed a memorandum of understanding (MoU) setting out the basis for a long-awaited merger of the two companies. The proposed “merger of equals” will result in the creation of a new holding company that will own both the existing airlines and will be controlled by the current BA and Iberia shareholders. It will enable BA and Iberia to retain their own corporate identities and existing traffic rights. The new holding company, TopCo, will be a Spanish incorporated organisation registered in Madrid, but its operating and financial headquarters will be in London.
Under the terms of the deal, BA shareholders will receive one new ordinary share in TopCo for every existing BA ordinary share held by them, while Iberia shareholders will receive 1.0205 new ordinary shares for every existing Iberia ordinary share they hold. This will mean that BA will control 55% of the equity of the new holding company and Iberia the remaining 45%.
The airlines believe there is a compelling strategic rationale for the transaction, and they hope to generate annual savings of approximately €400 million (US$602m) by 2015, claiming that the deal will “benefit both companies’ shareholders, customers and employees.” The new airline group would have a fleet of over 400 aircraft and fly to over 200 destinations with combined revenues of around €15 billion (US$22.5bn). In 2008, British Airways and Iberia together carried 62 million passengers, although this figure will have declined in the current year due to the economic crisis.
The signing of a definitive merger agreement is expected in the first quarter of 2010, but remains subject to a number of pre-conditions. These include appropriate confirmations from the Spanish and UK Civil Aviation Authorities to the structure of the new business, the final stages of due diligence on both parties and a successful conclusion to BA’s ongoing discussions with its pension trustees. A break fee of €20million (US$30m) will enable either of the airlines to walk away from the merger at any time, while Iberia will be entitled to terminate the agreement should it believe that BA has not reached a satisfactory conclusion with its pension talks.
The two airlines expect to present the transaction for shareholder approval by early November 2010 with completion expected to occur approximately one month after that.