EMPRESAS: The Merger of Iberia and British Airways (in English)

Last January 2011, two of the world´s most important airways merged to create a new gigant company that would fly the skies of the whole Earth.

Since the begining of the 2000 decade, the aviation market was going through a very difficult scene: the economic crisis, a falling demand, oil prices at record levels, the competition from low cost airlines, difficults in accessing to bank finance, the merger of some competitors...

With this situation, British Airways (BA) had found in the Spanish airline Iberia the perfect partner to diversify the business, extending the market to new destinations, improving its financial structure and creating a stronger and more competitive company.

The negotiation between both airways started in 2008. However, the relationship between them came from 10 years ago, when British Airways (BA) had acquired the 9% of Iberia. Furthermore, both companies were members of the strategic global alliance Oneworld several years ago.

The directors board of both airways approved the fusion in november 2009, with the approval in theirs respective shareholders meetings. The union was formalized in 2010 with the signature of the merger agreement. The terms and conditions of the merger agreement were in line with the blinding agreement ("Memorandum of Understanding" -MOU-) that the two companies had signed.

The new society born of the merger was called Consolidated Airlines Group, although it would be openly known as International Airlines Group (IAG). IAG would have a turnover around 15,000 million euros, being the 6th world´s airline by sales. In Europe, the new company would be the 3rd airline, just behind the German Lufthansa and Air France-KML. IAG would have a fleet with 406 airplanes that would fly to 204 destinations, transporting around 60 million passengers a year.

In the MOU was established that the shareholders of BA would receive one new ordinary share of IAG for each share they had in the old British airline, while the shareholders of Iberia would receive 1,0205 new shares for each share they had in the Spanish company.

In this changing operation wouldn´t take part the Iberia´s owned-shares (acciones en autocartera), neither the cross-shareholdings between BA and Iberia. In fact, as part of this merger, it was expected to cancel the owned-shares, and remain the cross-shareholdings in its respective companies.

The operation would be implemented through several transactions:

a) First, the transfer (by universal succession) of the whole Iberia´s business to a newly created Spanish subsidiary.
b) Second, the creation of a new BA´s holding company.
c) And finally, the merger of Iberia with the new British holding company.

In the merger negotiation, both companies used their respective strenghts: BA was larger (its capitalization value and revenues were higher) and it had a leadership position in Central Europe and in the connections between Europe with North America. But Iberia had a better financial and solvency situation (BA was heavily indebted) and it had a leadership position in Spain and in the connections with South America. 2008, 2009 and 2010 had been very hard years for both companies, acumulating losses in some of them.

Finally by the terms of the agreement, Iberia´s stakeholders would have the 45% of the capital of the new company, and British Airways (BA) would have the remaining 55%. The BA majority position in IAG was because of the bigger size of the British airline. In fact, BA had a equity value of 3,150 million euros, almost a 20% more than Iberia´s equity, that worth 2,506 million euros.

IAG shares would start to be traded on the Madrid and London Stock Markets, and the president of the new company would be Antonio Vázquez (the old president of Iberia), while Willie Walsh (the old CEO of BA) would be the CEO of IAG.

The agreement included the establishment of the general headquarters in Madrid, while the financial and operational hearquarters would be in London. Despite the fusion, both airlines would continue to operate as independient companies, mantaining their respective brands (Iberia and British Airways).