BA, Iberia Advance "Long, Drawn Out" Merger Effort

The boards of British Airways and Iberia last week signed a memorandum of understanding, bringing the airlines one step closer to the all-stock merger that's been more than a year in the making.

Operating as a single holding company, dubbed TopCo, the €15 billion merged entity would retain each brand as a national flag carrier, while preserving the "current operations of each airline."

Completion of a deal could take another year. The carriers said they expect to sign a definitive merger agreement in the first quarter next year, after which it will require shareholder approval no later than "early November 2010 with completion expected to occur approximately one month following such approval." The deal requires approval from regulatory authorities and both carriers' shareholders.

Citi's U.K.-based transport sector analyst Andrew Light in a research note this week called it a "long, drawn out timetable," though that buys the carriers time "to resolve pension and regulatory issues, the latter straightforward."

Under the terms of the agreement, British Airways shareholders, which will hold 55 percent of the holding company, would gain one share in the merged entity for each share currently held, while Iberia shareholders, comprising the other 45 percent, gain 1.0205 new shares for every existing Iberia share held. Each carrier will designate half of the 14 TopCo board members.

Citi's Light said the agreement is a "better deal for Iberia shareholders" since they would gain a higher percentage of the company than the 30 percent of 40 percent stake initially envisioned.

British Airways CEO Willie Walsh during an investor presentation last week in New York said, "We've now been talking to Iberia for some considerable time, but those discussions received some renewed impetus as the result of change in top management at Iberia during July," he said, referring to the Iberia's Fernando Conte stepping down from the CEO post.

"We've had very constructive negotiations and discussions with the new senior management team at Iberia, and I believe that the major issues that were outstanding between us have largely been addressed," said Walsh, who is slated to become CEO of the new airline group upon completion, with CFO Keith Williams poised to take on the role as British Airways CEO.

Iberia's new chairman and CEO, Antonio Vázquez, who will become chairman of the new holding company once the deal is complete, in a statement said, "It has been a long process where many people, both at British Airways and Iberia, have worked very hard to reach this agreement, but in the end it was worth it." Rafael Sánchez-Lozano will assume Vázquez's current role upon the deal's finalization.

Combined, British Airways and Iberia would fly 419 aircraft, serving 205 destinations for their 62 million joint passengers. For customers, the carriers envision a broader network, more frequent flyer benefits and access for more lounges. Noting their "complementary network"—with British Airways' presence in North America, Asia/Pacific and Africa matching well with Iberia's strength in Latin American—the airlines are promising customers of both carriers "better frequencies and connections, more competitive prices." The carriers expect to achieve around €400 million in synergies annually.