International Airlines Group is to end its planned purchase of Air Europa.
The existing deal, as agreed in 2019, is to be terminated. The two sides are to explore “alternative structures” – though it is hard to envisage what be agreed to satisfy all of IAG, Globalia and competition regulators.
Willie Walsh’s Last “Transformational” Deal
In late 2019, IAG agreed to buy Air Europa from for €1 billion in cash.
As former CEO Willie Walsh would say this was intended to be a “transformational” deal. It was meant to solidify Iberia in Central & South America and make Madrid a “360 degree” global hub in Europe to rival Amsterdam and Frankfurt.
Air Europa was intended to be a subsidiary of Iberia and positioned as a “value carrier” in IAG in the mould of Aer Lingus. Although not confirmed at the time, it was likely that Air Europa would be rebranded to align with Iberia. Otherwise, IAG would have had no less than 5 different brands in Spain.
The deal was renegotiated in early 2021 with the purchase price reduced to €500 million and deferred until 2026.
The transaction was under review by the European Commission with its findings expected in early 2022. The Competition & Markets Authority in the UK also recently opened a preliminary investigation into the deal.
IAG issued a short statement on the morning of Wednesday 15 December advising it was at an advanced stage to terminate the planned acquisition.
IAG and Globalia To Explore “Alternative Structures”
IAG and Globalia have today, Thursday 16 December, agreed to terminate the planned acquisition.
IAG will pay Globalia an agreed break fee of €40 million and an additional €35 million.
The two sides will, by the end of January 2022, explore possible alternative structures that may work for both parties.
IAG has issued the following statement:
International Airlines Group (“IAG”) and Globalia today announce that they have terminated the agreement signed on 4 November 2019 and amended on 20 January 2021, under which IAG’s subsidiary, Iberia, had agreed to acquire the entire issued share capital of Air Europa (the “Acquisition”).
IAG has also reached an understanding with Globalia to evaluate, before the end of January 2022, alternative structures that may be of interest to both companies and offer significant benefits for their shareholders, customers and employees.
In addition to the previously agreed break-fee of €40 million, IAG will pay Globalia €35 million. Both parties have agreed that these amounts will be applied to reduce any future purchase price if a new agreement is reached and to avoid any litigation relating to the Acquisition.
Luis Gallego, IAG’s chief executive, said:
“It is very disappointing that we have had to terminate the current agreement to acquire Air Europa but the decision makes sense due to the market conditions, the deep crisis resulting from COVID-19 and taking into account our desire to maintain a disciplined approach to capital allocation. However, we have committed to analyse alternative arrangements with Globalia that could deliver significant benefits. In the same way, we will continue to work with the Spanish Government to guarantee the connectivity of Spain and the development of the Madrid hub.
“As it has for the last 94 years, Iberia will continue to carry out its mission to connect Spain with the world, working hard to strengthen and develop the Madrid hub so that it can compete as an equal with the other European hubs.”
Did The Deal Ever Make Sense?
For IAG this is the third unsuccessful acquisition – that we know of – after Nikki and Norwegian.
It has to be said there were aspects of the transaction that never made sense.
There was nothing Air Europa did that Iberia could not do itself through organic growth. Unlike London Heathrow, Madrid Barajas airport is not slot constrained. There was nothing Air Europa specifically did that could help Iberia grow in the Middle East and Asia.
The scope for synergies with Iberia was relatively limited as Air Europa operated primarily Boeing 737 and 787 aircraft.
It always seemed implausible that the deal could pass competition authorities without significant divestment of airport slots.
Regulators always look at airline mergers based on overlapping individual city pairs rather than, say, relative shares of slots at home airports or competition from alternative modes of transport such as domestic rail.
What Next For IAG?
Before COVID-19 IAG liked to present itself as the leading airline group in Europe with a track record successful airline acquisition and integration.
Under the leadership of Luis Gallego this is likely to be the last proactive airline acquisition activity by IAG for some time as it focuses on reducing debt and returning to profitability in the coming years.