Spanish airline Iberia and its parent International Airline Groups (IAG) continue to work on an acquisition plan for Air Europa, but it will have to be based on a different business structure if it wants to meet conditions set by the Spanish government and the European Commission. Not helpful is the financial situation of Air Europa owner Globalia. Is a new acquisition plan of Air Europa possible? There was some confusion on December 15, when IAG released a media statement early in the morning which confirmed a report in the Financial Times that discussions with Air Europa-owner Globalia were in an advanced stage to terminate to acquisition. But later that day, IAG CEO Luis Gallego explained on CAPA Live that “we will not continue with the current structure but are trying to have a new structure that allows this deal to happen.” In a new statement on December 16, IAG says that it will evaluate with Globalia alternative structures before the end of January "that may be of interest to both companies and offer significant benefits for their shareholders, customers, and employees." Gallego said on Wednesday: “We always said that from a strategic point of view, (the acquisition) is very important. Not only for the Group but also for the Madrid hub and for the connectivity of Spain. Unfortunately, because of the devastating effects of the pandemic, the conditions aren’t favorable to close the agreement in the original state. We are in advanced conversations and are tracking all possibilities to continue. We can’t provide more details.” Original acquisition plan announced in November 2019 IAG announced on November 4, 2019, its intention to purchase Air Europa for €1.0 billion from Globalia, a privately owned company run by the Hidalgo family. It would be a bolt-on acquisition to Iberia, with its subsidiary IB OPCO Holding actually purchasing Air Europa. The plan was to build Madrid Barajas into one of Europe’s key hubs, with strong connections to Latin and South America. IAG’s market share here would grow from 19 to 26 percent post-deal and the acquisition would bring significant synergy benefits. Then Covid happened in early 2020 which completely changed the position of Iberia and Air Europa. Both airlines needed support from the Spanish government to survive, although Iberia has seen the strongest recovery of all IAG airlines in recent months. In an amended agreement announced on January 19, 2021, IAG revised its offer for Air Europa to €500 million, which it would only pay in the sixth year after completing the deal or in 2027. The reason for this extended period was the financial support package that Air Europa had arranged with the Spanish government through the Instituto de Credito Oficial for €141 million in loans and through Sociedad Estatal de Participaciones Industriales (SEPI). Part of the SEPI package is a €475 million loan that will mature in 2027, which includes terms and conditions that were conditional on approval from the European Commission. Brussels launches an in-depth investigation On May 21, IAG notified the European Commission of the proposed acquisition of Globalia's air division of Air Europa, Aeronova, and Leon Activos Aeronauticos, after which Brussels launched an in-depth investigation in June to see how the merger between Iberia and Air Europa would impact competition on routes in and out of Spain. Iberia offered a number of proposals to the EC to safeguard competition, most likely by surrendering slots in Madrid. The investigation is still ongoing, with the deadline having been extended three times from early November to December and now until January 4. An Air Europa Embraer E195LR seen at Arteixo airport. (Richard Schuurman) With this uncertainty over its future, Air Europa is in standstill mode for months now that is severely affecting its recovery and development plans. While more active since late November, according to Eurocontrol data, Air Europa’s seven-day traffic average on December 15 was still 43.3 percent down on 2019 levels, with just 134 flights. Air Europa currently operates 41 of its 45 aircraft, which include three ATR 72s, 18 Boeing 737-800s, six Embraer E195LRs, eight Boeing 787-8s, and ten 787-9s. Difficult financial situation of Globalia But then there is another complicating factor that put the deal in jeopardy: the financial situation of Globalia. Not only does the company run an air division with Air Europa, but also has a hotel, retail, and wholesale divisions. Globalia doesn’t share its latest financial results on its website, but Spanish media reported that the cash and debt position has been seriously weakened by the effects of the pandemic. Gallego said in November that he expected that Globalia would need a recapitalization in the coming months. Trying to benefit from this situation, Iberia is said to have been negotiating a further discount of the €500 million offered for Air Europa in January. This is the point where the deal seems to have stalled as proceeding would mean Globalia would be practically giving away its airline for almost nothing while still having to meet the obligations and terms of the previously arranged aid package with SEPI. The odd situation is now that Iberia actually has to pay Globalia. The original agreement of November 2019 includes a condition that Iberia would have to pay a break-fee of €40 million if negotiations would be terminated without a deal. This fee has now been increased to €75 million, which would give Air Europa a bit of breathing space. The December 16 statement adds: "Both parties have agreed that these amounts will be applied to reduce any future purchase price if a new agreement is reached and to avoid any litigation relating to the Acquisition." In this light, it’s fully understandable that the original 2019 agreement and the revised one from last January no longer reflect the correct situation of Air Europa. Just how the new structure that Gallego is referring to must look like to make the acquisition happen is unclear, but any changes to the original proposal will most likely mean that terms and conditions with the Spanish government and the European Commission will have to be renegotiated from the start. This makes it unlikely that the takeover of Air Europa will happen anywhere soon in 2022, if at all. That depends on how Globalia succeeds in bolstering its financial position and keeping itself afloat amidst what looks like another Covid-crisis coming named Omicron. In a statement later on December 16, the European Commission says it 'takes note" of the announcement from Globalia and IAG to terminate their proposed agreement. Commissioner Margrethe Vestager noted that the EC had identified competition concerns during its in-depth investigation in June: "The in-depth analysis carried out during the phase II investigation indicated that the merger would have negatively affected competition on some domestic, short-haul, and long-routes within, to and from Spain. Our assessment fully took into account the impact of covid restrictions on the markets affected. IAG offered remedies, but taking into account the results of the market test, the remedies submitted did not fully address our competition concerns."
