The management teams and lawyers of Iberia and Air Europa are once again in talks to close a new integration agreement for the airline of Globalia in the group IAG. And it will be the third since October 2019. The acquisition by Iberia, which was always the jewel in the family’s crown Gentlemanpresents figures similar to those agreed in January of last year: 500 million for the capital plus a financial debt that has skyrocketed above 600 million euros as an umbrella in the face of the collapse of the activity in 2020. The buyer raises again the payment in installmentspoint out sources familiar with the details.
The disastrous passage of the pandemic on the airline sector has reduced the size of the two large Spanish network airlines (economic results, routes and fleet), and also of the operation. A circumstance that notably changes the path that Iberia traveled in 2021. This time the supervisor will be the CNMC and not the EU Directorate General for Competition. Sources close to the negotiations explain that the integration scheme, in which he is working Garrigues, will be sent to the regulator in November. “In the first week of December at the latest,” they qualify. Mutism has been imposed in companies.
The essential step, therefore, is that of a new contract with the owners of Globalia, where Javier Hidalgoson of the president and owner Juan Jose Hidalgo, again leads the selling side. And the contacts are on the right track.
The price of Air Europa continues to be around 500 million in installments plus a financial debt that exceeds 600 million
From there, this corporate operation again requires a resolute support of the Spanish Governmentwhich must also guarantee the survival of Air Europa for the recovery of the rescue of 475 million loaned by SEPI to the airline and the 160 million credit guaranteed by the ICO with which it weathered the crisis. And it is that any Member State of the EU or individual, as is the case of a rival airline, can demand that Brussels enter fully. An extreme that would not be strange in the face of the belligerent position of Air France and Lufthansa, and their respective countries, in the face of the strengthening movement in Madrid of a rival of the first magnitude such as IAG. Germany and France, precisely, have provided strong financial support to their strategic companies, including the aforementioned airlines during the crisis. Even the EC could ex officio claim the role of supervisor that it had between May and December 2021.
This attempted marriage returns to the scene after Iberia withdrew the previous protection in the hands of the Competition Commission due to the difficulties presented by a market context never seen before. Both companies saw that stepping back was the best option to avoid the imposition of concessions (remedies) unaffordable that left this historic operation in the Spanish air sector dead. Since then work has been done on its revitalization.
In full difficulties due to mobility restrictions, IAG, parent company of Iberia, granted a credit of 100 million to Air Europa, convertible into 20% of the airline’s capital, which the firm led by Luis Gallego has ended up executing. Previously, Iberia paid 40 million to Air Europa for breaking the previous acquisition agreement and another 35 million to prevent the Hidalgos from denouncing that decline. The 75 million have been reinvested in Air Europa itself.
Iberia can negotiate exclusively with Air Europa until March, which dampened the appetite of another potential buyer, Air France. Then two years are opened in which it has the option of trial and error if a competing offer arrives or it could decide to sell its 20% at the same price as Globalia.
Who buys?
Among the pending fringes is whether the report before the CNMC is presented by IAG or by Iberia, although both are treated as the same entity. And, more importantly, it has not yet been decided whether to repeat the strategy of anticipating the discounted request for remedies by Competition with a scheme fix it firstwhereby the buyer presents the rivals to which it would cede part of the resulting business in order to promote competition and pave the way for the acquisition.
The IAG airline has until March to deal exclusively with the takeover of its rival
Iberia has already put on the table the candidacies of flutter and World2Fly to give them slots (takeoff permits at main airports), routes and even planes. Without being rejected, these solutions did not dazzle the Directorate General for Competition due to the size and experience of both companies with a Spanish operating certificate.
From the contacts maintained between the IAG company and the community authorities, it was seen that more traditional solutions were preferred in the airline sector.
Arguments for and against
IAG and Iberia seek to reach 100% of the historic rival from their current 20% package. The approaches that they use to avoid the Competition veto sound like those of the previous approach.
First, the increased volume of the resulting company is vital to enhance the hub from Madrid with a company that can operate with a 360-degree commercial view. The two protagonists of the integration compete on routes to Latin America, overlapping their offers and without the ability to look to the East and Asia. Far from what happens in other large Spanish airports, in Madrid-Barajas only 5% of the seats are destined for Asia, key to improving the figures and performance of tourism arriving in Spain. That share rises to 25% in Paris, Amsterdam or Frankfurt.
The support of the Government is vital in the face of a possible review of the operation by the EC
It will also be wielded imbalance in connections between the hubs from northern Europe, with a strong dominance of firms such as KLM, Air France and Lufthansa, compared to those in the south, where smaller companies such as Iberia, TAP and ITA operate. And a third argument in favor of marriage between airlines is the existence of competitors with a high market share on South Atlantic routes, as is the case with Latam, Avianca or Air France.
Brussels saw last year competition problems on some 70 routes. The context, with the pandemic hitting, was not the same.
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