International Airlines Group (IAG) is not giving up on its plans to acquire Spanish carrier Air Europa. IAG and the airline’s owner Globalia have reached an agreement for a seven-year, unsecured loan of €100 million. It also provides exclusivity to IAG for one year to continue discussions about a potential twenty percent stake in Air Europa. Loan buys IAG time to get Air Europa deal done.
The loan was announced by IAG in a media statement on March 17. Only three weeks ago, Group CEO Luis Gallego said during IAG’s 2021 earnings call that he was pessimistic about a deal with Globalia, as the travel group seemed to prefer negotiations with another party.
Back in December IAG and Globalia said they had ended negotiations over the acquisition plan that was first revealed in November 2019 and which would IAG buy Air Europa for €1.1 billion. Following the Covid-crisis, IAG wished to lower its bid to €500 million. After Globalia’s liquidity position has weakened further in the past two years and the group and Air Europa are restricted by terms and conditions set out in the state aid package, continuing negotiations became fruitless. IAG and Globalia said in December that they would give it another month until the end of January to explore other options to conclude an agreement.
Despite Gallego’s remarks on February 25 that such an agreement seemed unlikely, the doors on reaching a deal have reopened again. The €100 million alleviates Globalia’s immediate urgency for cash without restricting Air Europa further to terms from the government. And it literally buys both parties time to seek alternatives for an agreement at a later stage, with a twenty percent stake in Air Europa likely to be the first step towards a higher percentage of maybe even a full integration of the carrier within IAG.
Strengthening Madrid hub remains of strategic importance
In the latest statement, Gallego repeated what he has said many times before about the logic behind the acquisition of Air Europa: “We remain convinced about the strategic importance of this deal to the development and competitiveness of Madrid’s hub.” In the original plan in 2019, IAG said that acquiring Air Europa would strengthen Madrid Barajas and help it make a key hub for the Latin and South American network of not just Air Europa, but especially for Iberia.
But Gallego added on March 17: “Since we started negotiations, the world has changed. This agreement will give us time to evaluate with exclusivity alternative structures that may be of interest to both companies and offer significant benefits for their customers, employees, and shareholders.”
The agreement on the new loan and the roadmap to getting a deal done are conditional on a few things. First, Globalia/Air Europa needs to receive approval from syndicated banks that have partially guaranteed loans. The Instituto Credito Official (ICO) guaranteed a loan of €141 million and the Sociedad Estatal de Participaciones Industriales (SEPI) another €475 million loan that matures in 2027.
Besides the period of exclusivity of one year for discussions to take place, IAG says it has secured “the right to match any third party offer for the airline in the next three years, together with a right to exit alongside Globalia should it sell Air Europa at any time in the future.” So far, no names of potential third parties that Gallego referred also to on February 25 have emerged in public.
IAG has now decided that if it can’t have Air Europa, no one else will have it either.
IAG is clearly hoping that, given enough time, it can find a way around the regulatory hurdles. The problem is that there is no other domestic carrier in Spain which is large enough to take on the routes that Air Europa would need to sell. IAG may need to find a way of creating ‘an airline within an airline’ which could be sold as a stand-alone carrier and future competitor.