IAG Acquires Air Europa For 50% Off The Original Purchase Price Of €1 Billion

In November of 2019 IAG, the parent of British Airways, Iberia, Aer Lingus, Vueling, and Level had reached an agreement to acquire its Madrid based rival Air Europa for €1B but this deal has now been renegotiated reflecting the impact of the pandemic.

A new update from IAG reveals that the two parties have agreed to a 50% reduction of the original price and IAG will now pay 500 Million Euro for Air Europe, payable in 6 years.

We originally reported about this when IAG published details in late 2019 (see our article here).

That’s a pretty good deal that IAG got here considering they are able to essentially put the purchase on a credit card, throw it in a drawer and pay no interest on it for the next six years.

The value of airlines has severely diminished during the pandemic and what once were profitable companies turned into a money furnace requiring billions in state aid to avoid bankruptcy.

Apparently IAG realized that they better renegotiate their position of purchasing Air Europa or pull the plug if the company isn’t willing to drastically lower the price and according to their press release on Tuesday they came to an agreement with Air Europa’s owners Globalia.

International Airlines Group (“IAG”) and Globalia today announce that they have amended the original agreement announced on 4 November 2019 (the “Original Agreement”) under which IAG’s subsidiary, Iberia, has agreed to acquire the entire issued share capital of Air Europa (the “Amendment Agreement”) (the “Acquisition”).

Under the terms of the Amendment Agreement, the parties have agreed that the amount to be paid by Iberia for Air Europa will be reduced from an equity value of €1 billion to €500 million with payment deferred until the sixth anniversary of the Acquisition’s completion.

The revised terms in the Amendment Agreement are conditional on the satisfactory negotiation between Iberia and Sociedad Estatal de Participaciones Industriales (“SEPI”) regarding the non-financial terms associated with the financial support provided by SEPI to Air Europa during 2020. Iberia intends to begin discussions with SEPI shortly concerning these conditions.

Assuming satisfaction of all conditions of the Amendment Agreement and the Acquisition, completion is expected to take place in the second half of 2021. The Acquisition is still subject to approval by the European Commission.

Strategic Rationale and Financial Impact

The Board of IAG continues to believe that the Acquisition remains strategically important for the future of IAG and Iberia and positions the Group to benefit from growth opportunities as the industry emerges from the unprecedented impact of the COVID-19 crisis. The benefits of the Acquisition include:

• Increasing the importance of IAG’s Madrid hub, transforming it into a true rival to Amsterdam, Frankfurt and Paris Charles de Gaulle;
• Unlocking further network growth opportunities; and
• Delivering significant customer benefits through providing increased choice and schedule flexibility and greater opportunities to earn and redeem miles.

IAG continues to expect the Acquisition to generate significant cost and revenue synergies, with full run-rate synergies similar to those originally envisaged and now expected by 2026. The Acquisition is expected to be earnings accretive in the first full year following completion, deliver considerable value to the Group through synergy generation prior to the payment of the consideration on the sixth anniversary of completion, and generate returns on invested capital in line with those historically achieved by IAG by then.

Assuming completion in the second half of 2021, IAG will be taking on Air Europa at a time when air travel recovery could be meaningful as the rollout of COVID-19 vaccines proceeds worldwide. Net cash outflow to IAG of this transaction is expected to be minimal in 2021 and net cash flows are expected to be positive until at least the repayment of the loan from SEPI in 2026 when merger synergies are expected to be at their full run-rate. …

The Acquisition constitutes a Class 2 transaction for the purposes of the UK Financial Conduct Authority’s Listing Rules and, as such, does not require IAG’s shareholders’ approval.

The gross assets of Air Europa at 31 December 2019 were €967 million. Revenue of €2.1 billion, operating profit of €71 million and pre-tax profit of €42 million were attributable to Air Europa for the year ended 31 December 2019. These figures are based on Spanish GAAP. Air Europa carried 13.1 million passengers in 2019. Passenger volume declined by approximately 70 per cent in 2020.

Air Europa currently has an operating fleet of 52 aircraft compared to 68 at the end of 2019. All aircraft except one are on operating lease. IAG estimates the IFRS 16 lease liabilities of Air Europa to be c.€1.6 billion as of the end of 2020.

Here is the entire press release in pdf:

Download (PDF, 142KB)

Last year the Spanish Government has stepped in and provided a bailout package of €475 million for Air Europa with funding being provided by their Strategic Business Solvency Support Fund which is split into a €240 million backed equity loan and a €235 million regular loan. So these funds have to be paid back to the Spanish government, it’s not “free for all” Monopoly money. As such it has to be taken into consideration when it comes to renegotiating the purchase.

Airlines that were once worth Billions have suddenly become a liability. Their continued operating costs even while being on the ground are gigantic and with the pandemic showing very little sign of slowing down I wonder when the next big packages of state aid are being sent their way.

Conclusion

Air Europe used to be a profitable company pre-pandemic and will likely be profitable again at some point, complementing the IAG network carriers. When that will be is anyone’s guess because these days the aviation market in Europe doesn’t look very bright. It will take many years or even a decade+ until the industry is back at 2019 levels.

Surprisingly so far there have been very few if any objections to this acquisition. With the purchase of Air Europa and either combining it with Iberia or running it alongside IAG is creating another mega hub in Madrid similar to their operations in Heathrow. Of course Heathrow/UK has now “brexited” the EU so in how far that can still be taken into consideration is another matter.

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