Table of contents 1. Introduction 2. Executive summary 3. Definition and type of merger 4. Brief history of BA, and Iberia 5.

Merger analysis 6. Recommendations and conclusion 7. Bibliography British Airways, Iberia Merger

Introduction

BA and Iberia Merger talks which started in 2008 was completed in January 2011. In this project Im going to give an analysis of the merger by looking at the type of merger, reaction of shareholders, and the reaction of the regulatory authorities. I will also take a look at how the merger was financed, how the market has reacted to the merger, the synergies that resulted from the merger and my recommendations.

Executive summary The Iberia, BA merger started sometime in 2008, but was finally completed in early 2011. They two airlines are public companies listed in the stock exchange. Iberia is based in Spain, while British Airways is based in London. Operating in the same line of business, both companies saw an opportunity for them to come together as one entity in order to compete favorably in the industry. This combination would help them to meet the challenges of the present environment I the European market and worldwide through the implementation of a project which will enable both companies to reach greater height in financial robustness, profitability and efficiency in the interest of their shareholders. The regulatory body for the airline industry after a thorough investigations and consideration decided to give a green light to the proposed merger. And accordingly the shareholders of the two airlines equally voted in support of the merger. A merger agreement was then reached with ownership and other terms of the merger transaction taking care of. On 24th January 2011, the merger was completed by the listing of the combined entity, International Airline Group in the stock exchange.

Definition and type of merger Merger is a transaction which involves two or more business organizations combining into a single entity. There are two major types of merger, horizontal and vertical mergers. According to William M et al in their book Introduction to Corporate Finance, Horizontal merger is a merger between companies that produces identical or closely related products in any geographical market. While a vertical merger occurs when companies with current or potential buyer-seller relationships combine to create a more integrated company.1 From these definitions we can see that the BA, Iberia merger is clearly a horizontal merger as both companies are in the same line of business and they operate in the same geographical location. Brief history of BA and Iberia BA British started in 1919 as an amalgamation of pioneer airlines. It later became Imperial Airways in 1924. Due to the expansion of British Empire, by the coming together of Imperial Airways and British Airways Limited, the name was changed in 1939 to British Overseas Airways Corporation (BOAC). BOAC lasted up to the 70s when it was renamed British Airways. British Airways was later privatized in 1987. And today it is one of Europes leading airline operators with domestic and international flights. 2 Iberia Iberia Airline was founded in Spain in 1927 as a commercial airline. In 1944 Iberia airline became nationalized and in 1991, Iberia initiated Europes first frequent flyer program. Iberia launched their website Iberia.com in 1996. Later in 2001 the airline was privatized. Iberia has its corporate headquarters in Madrid and they employ over 24,000 people.3 Merger analysis BACKGROUND INFORMATION AND REASONS FOR THE MERGER Both Iberia and BRITISH AIRWAYS are public companies. The two companies are engaged directly and through their affiliates in the business of operating national and international airline
1

William M et al (2008). Introduction to Corporate Finance

http://www.dooyoo.co.uk/airline/british-airways-in-general/1035468/ British Airways in general

http://www.mahalo.com/iberia-airlines/ Iberia History and Information

services. In view of this, both companies started discussions targeted at implementing a close industrial, financial and operating combination between Iberia and British Airways. This combination is expected to enhance services to their customers and generate substantial synergies, which will allow both companies to create a new leading European airline group. The aim of the merger, according to the merger plan produced by both companies is basically to build a new organization to meet the challenges of the current environment in the European market and worldwide by implementing a project which enables both companies to reach greater levels of financial robustness, profitability and efficiency, in the interest of both groups, their shareholders and other stakeholders4 Iberia and British airways started talks about an all share merger around July 2008. The two companies had to reach a consensus concerning the size of British Airways pension deficit and how the stock of the new entity would be shared between both sets of shareholders. The European Commission as the regulatory body of mergers in the Euro zone had earlier given their green light to the merger after it was found that the proposed merger would not hinder an effective competition in the transport market. Therefore, in 2010, Iberia and British Airways entered into a merger agreement whereby both parties agreed the terms and conditions of the combination of both companies on the basis of a merger whereby, subject to the nationality structures and to the transactions relating to the cross shareholdings, IAG would become the holding company of both airlines, with the existing shareholders of Iberia and British Airways becoming shareholders of IAG thereby resulting in a single body of shareholder5 In November 2010, shareholders of the two airlines voted in support of the merger which values the pair at a combined 7.1 billion. The merger however, was completed on 24th of January 2011 following the listing of the shares of the new entity which is named International Airline Group (AIG). The merger creates the worlds sixth largest carrier and the third largest carrier in Europe by revenue. According to the terms of the merger agreement, the two airlines will still retain their separate brands and operations. Size of the combined airline The combined entity will have a fleet of about 406 aircraft and 55 million passengers in 2010. A combined network of 204 destinations and an expected 57.5 million combined annual passenger numbers was created from the merger.6
4

Merger plan, Madrid June 2010, http://media.corporateir.net/media_files/irol/24/240949/mergerplan.pdf

5

Merger plan, Madrid June 2010, http://media.corporateir.net/media_files/irol/24/240949/mergerplan.pdf

6

Centre for Asia Pacific Aviation and airline reports , British Airways and Iberia merger completed; plan to

add more airlines to group, 26th January 2011, http://www.centreforaviation.com

Synergies resulting from the merger The expected annual synergies from the merger are worth around 400 million starting from the fifth year of the merger. A breakdown of the synergies shows that about 60% of it will arise from cost savings, and 40% from larger revenues.7 Network resulting from the combined entity The combination provides Iberia more facilities for travel to Asia, where British Airways is very well established, While British Airways will provide more options to its customers for travel to Latin America, where Iberia is a market leader. The carriers will also coordinate their services.8 Fares The merger makes it possible for the fares of the two airlines. And passengers will also get access to over 120 VIP lounges in airports while regular flyers would gain from the coordination between Iberia plus and British Airways Executive Club Organizations. 9 Headquarters The combined entity; IAG is registered as a Spanish company having a tax domicile in Madrid, where it will be holding its board of directors and general shareholders meetings. IAGs financial and operational headquarters will be in London. The board of AIG is made up of 14 members, seven from BA and seven from Iberia. The management team is made up of six members, three from each company. Ownership and finance involved According to the merger agreement British Airways will hold 55% of IAG, while Iberia will hold the remaining 45%. However, BA and Iberia will have to retain their current operations and individual brands. The deal is an all share merger and according to the terms of transaction, British Airways shareholders will receive one share of the holding company for every share they currently own, while Iberia shareholders will receive 1.0205 shares for every share they hold.10
7

Centre for Asia Pacific Aviation and airline reports , British Airways and Iberia merger completed; plan to

add more airlines to group, 26th January 2011, http://www.centreforaviation.com

8

Centre for Asia Pacific Aviation and airline reports , British Airways and Iberia merger completed; plan to

add more airlines to group, 26th January 2011, http://www.centreforaviation.com

9

Centre for Asia Pacific Aviation and airline reports , British Airways and Iberia merger completed; plan to

add more airlines to group, 26th January 2011, http://www.centreforaviation.com

10

Dawn Kawamoto, British Airways and Iberia Announce Merger Plan,

http://www.dailyfinance.com

Shares performance after the merger Shares in the combined entity, International Airline Group (AIG) are listed for trading on the stock exchanges of London, Madrid, Barcelona, Bilbao, and Valencia. AIG made its stock market debut on 24th January 2011 at a valuation of 6.1 billion. The share opened at 288.10 on the London FTSE 100 and closed the day at 285 pence, going down by 1.1%. Also in Madrid the share price went down 1.22% to 3.31. AIGs top investors include investment and pension funds such as BlackRock, Standard life, Janus Capital and Scottish Windows.11 Recommendation and conclusion In my opinion the BA, Iberia merger was a good move. If everything works as planned the two airlines would gain hugely from the resulting synergies from the merger, especially at this time of global economic meltdown. The combination has resulted in a very much stronger group which will undoubtedly give them a strong competitive edge over their competitors. My recommendation will be for them to market the AIG brand very well so that the public would know exactly what it is they stand to gain from the merger of these two airlines, when this is done, they will attract new customers and they will also retain their old customers. Bibliography
William M, Scott S, & Brian L (2008) Introduction to Corporate Finance, London: Cengage Learning http://www.dooyoo.co.uk, - British Airways in general, 01/09/06

http://www.mahalo.com

Iberia History and Information

http://media.corporate-ir.net/media_files/irol/24/240949/mergerplan.pdf, Merger plan, Madrid June 2010 http://www.centreforaviation.com,

Centre for Asia Pacific Aviation and airline reports , British Airways and Iberia merger completed; plan to add more airlines to group, 26th January 2011, Dawn Kawamoto, British Airways and Iberia Announce Merger Plan,

http://www.dailyfinance.com

11

Centre for Asia Pacific Aviation and airline reports , British Airways and Iberia merger completed; plan to

add more airlines to group, 26th January 2011, http://www.centreforaviation.com