British Airways Plc, Europe's third- largest airline, may make an offer for Iberia Lineas Aereas de España SA with a group of private equity investors to protect its interest in the Spanish carrier.
British Airways has approached ''a number of private equity companies,'' the London-based carrier said today in a statement. The airline hasn't made a final decision on the future of its 10 percent Iberia stake and may sell the holding, the company said. TPG Inc. said March 30 it may make a bid for Iberia, which has a market value of 3.76 billion euros ($5.1 billion). Iberia's Latin American routes make Spain's biggest airline an attractive target for airlines and private equity groups including buyout firm TPG, Deutsche Lufthansa AG and British Airways, according to Chairman Fernando Conte. British Airways jointly manages routes between the U.K. and Spain with Iberia. "They don't want to lose their joint venture agreement with Iberia or worse, have it go to a competitor,'' said Stephen Furlong, an analyst at Davy Stockbrokers in Dublin. ''They're keeping their options open in a situation that was probably forced upon them.'' Shares of Iberia rose as much as 5 cents, or 1.3 percent, and were up 0.25 percent at 10:13 a.m. in Madrid. The stock has risen 44 percent so far this year on speculation of a takeover offer. British Airways rose as much as 5.5 pence, or 1.1 percent, to 519.5 pence and was up 0.1 percent as of 9:12 a.m. in London. More Capital A bid wouldn't involve additional capital investment by the airline, British Airways said. The carrier declined to name the private equity companies it approached because it's bound by confidentiality, said Thomas Coops, a company spokesman in London. ''British Airways wants to protect what it's got and if it can do this without extra cash, that is quite an attractive proposition,'' said Gerald Khoo, an analyst with Oriel Securities who has a ''buy'' rating on the stock. TPG, formerly known as Texas Pacific Group, said last month it was considering a 3.4 billion-euro bid for Iberia as trans-Atlantic carriers prepare for more access to routes. A new aviation treaty between the U.S. and the European Union has triggered interest in industry consolidation. ''In the past, weak earnings and the highly cyclical characteristics of the industry have deterred private equity investors,'' Samantha Gleave, a London-based analyst with Merrill Lynch, wrote in a research note on March 29. ''Better capacity discipline, improved margins and stronger cash generation and balance sheets are now attracting private-equity interest.'' TPG Investments David Bonderman, a TPG founder, bought Continental Airlines Inc. in 1993, when the Houston-based carrier hadn't produced a profit in 15 years. Two years later, Continental was making money and in 1998, Bonderman sold his stake for about $700 million, a 10- fold return. TPG is also part of a Macquarie Bank Ltd.-led A$11.1 billion ($9 billion) attempted buyout of Qantas Airways Ltd., Australia's largest carrier. Shareholder Balanced Equity Management turned down the offer March 23, threatening what would be the world's biggest airline takeover. The Fort Worth, Texas-based buyout firm has also invested in America West Airlines Inc., Ryanair Holdings Plc and Tiger Airways Pte. Bonderman is chairman of Dublin-based Ryanair, Europe's biggest no-frills carrier. After TPG's March 30 announcement, British Airways said that it appointed UBS AG to advise on how to use its Iberia stake. The company bought the holding in 1999 after the Spanish government decided to sell 40 percent of Iberia to a group of investors including AMER Corp.'s American Airlines. Iberia InvestmentBritish Airways and American paid 273 million euros for their stakes. British Airways bought American's 1 percent stake in November, and now owns 10 percent of Iberia, making it the airline's biggest shareholder, according to Bloomberg data. The U.K. carrier has a ''right of first refusal'' on another 30 percent of its Spanish partner, meaning British Airways ''speaks for 40 percent of Iberia in a bid situation,'' and ''such a stake would repel a hostile bid, or force a consensual bidder to pay a higher price,'' Chris Avery, a JPMorgan analyst in London, wrote in a research note March 29. Any group making a bid is ''likely'' to include one or more Spanish partners, British Airways said. At least 51 percent of Iberia would have to remain under Spanish control for the airline to keep traffic rights with other countries. While the European carrier's rights to fly to the U.S. would be assured under the ''open skies'' agreement, landing rights in Latin American countries are still governed by bilateral agreements between individual nations. The U.S.-EU agreement would allow any European carrier to fly from any airport in the bloc to the U.S. Joint Operations''The two airlines operate a lot of routes together using code-sharing and Iberia is very strong on Latin American routes where British Airways has been traditionally weak,'' said Gert Zonneveld, analyst of Panmure Gordon, who has a ''hold'' recommendation on the stock. Lufthansa Chief Executive Officer Wolfgang Mayrhuber said April 18 that the airline, Europe's second biggest, wasn't planning any immediate takeovers, though Iberia's Latin American network would fit well with the Cologne, Germany-based carrier. Lufthansa Chief Financial Officer Stephan Gemkow said a month earlier that his airline has a responsibility to look at possibly buying Iberia, although the stock's recent price increase would make any bid ''a hard sell.'' The price of credit-defaults swaps based on British Airway's debt was little changed at 81,500 euros, according to Deutsche Bank AG. Credit-default swaps are financial instruments based on bonds or loans that are used to speculate on a company's ability to repay debt. A decrease indicates improving perceptions of credit quality. (Bloomberg)