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Takeover of British Airways, Iberia Coursework

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Introduction

Undoubtedly, British Airways is one of the largest carrier airlines in the world. British Airways has its headquarters in Waterside, United Kingdom, and operates into various destinations in the world. Mainly, the company operates from three hubs in United Kingdom, that is, London Heathrow Airport, Gatwick Airport and London City Airport.

So far, according to statistical reports, British Airways has grown to become the one of the largest airline companies on fleet size, international flights and destinations. From Africa countries to Asian destinations to Europe and South America, British Airways flies its flag high. Since its establishment in 1971, British Airways has undergone major changes that include merging of the then small airlines such as Northeast Airlines, Cambrian Airlines, Newcastle upon Tyre and Cardiff Airlines.

Precisely, in 1974, the four airline companies merged to form British Airways. However, thirteen years later, the then government of United Kingdom plotted a plan and privatised British Airways. Having undergone privatisation, the carrier embarked in a mission to expand its territories by acquiring British Calderon and Dan-Air airlines in 1987 and 1992 respectively (Marriott, 1998, pp. 4-13).

With time, the carrier went a step further to purchase new aircrafts for example, Boeing 787s and Airbus A320 family thus, expanding its operations and services. On 30 July 2008, British Airways and Spanish carrier Iberia embarked on discussions that will see British Airways takeover Iberia. One year later, the two carriers announced a pilot concurrence to merge the two carriers. The paper will examine the merging of British Airways and Iberia, the initial bid paid and other subsequent prices.

The paper will also examine the bid premium, the financing of the takeover, and the implications for the shareholders in the two companies. Lastly, the critical analysis into this takeover will establish the successes of the takeover. It is also important to note that in terms of corporate affairs, British Airways trades in London Stock Exchange following the successful Iberia takeover. This means that shareholders played a significant role in the realisation of the merger (British Airways, 2010, p.1).

Iberia /British Airways Bid

In normal bidding processes, the initial offer opens for 21 days, followed by 14 days of revision and finally, 60 days for the official bid. The bid involving Iberia and British Airways underwent the three stages. The market value of Iberia was 3.74 billion Euros and this was the initial bid totalling to 10 percent.

British Airways later increased this value to the current 13 percent. The desire to dominate the world airline industry prompted British Airways to engage in discussion that will see it take over Spanish carrier, Iberia. However, it is important to note that the bidding process of British Airways and Iberia took two and half years to complete. Although retaining their separate brands, the takeover between British Airways and Iberia had its own significance of establishing one of the most successful profit-making organizations in the world.

Undoubtedly, the successful takeover of Iberia/ British Airways established the third-largest carrier firm in the world in terms of annual proceeds. It is also important to note that the takeover saw British Airways/Iberia become the second largest airline group in the entire Europe.

So far, the two carriers now merged together are operational having commenced their services as an alliance in October 6, 2010. It is imperative to note that shareholders play a significant role in the management of organisations such as British Airways and Iberia. Without their consent, it is sometimes hard to carry out major operations aimed at attaining targets or acquisition. This is the same case with British Airways and Iberia takeover.

Financial experts drawn from the two carrier companies estimated the cost of the takeover to be 5.7 billion pounds (or US$8.9 billion). The two carrier companies agreed on this estimated value and consequently sought the consent of the shareholders. The shareholders of the two carrier companies had to vote in favour of the issue in order to grant permission for the merging of the two carrier companies. Interestingly, over 99 percent of the shareholders of both British Airways and Iberia voted in favour of the bid thus, allowing the merging of the two companies.

In separate investor meetings held in London and Madrid, the executives announced the vote results marking the deal with investors’ rubber stamp. Nevertheless, the deal did not go well especially with the cabin crew workers of British Airways. Just like the shareholders, the cabin crew workers had to vote on the issue. However, their plan did not mature to fruition (British Airways and Iberia sign merger agreement, 2010, p.1).

The potential motive of merging the two companies was to create a brawny business empire that will withstand the global credit squeeze. It is paramount to note that due to the prevailing economic downturn, many people had opted out of leisure activities. Consequently, the airline industry faced declining demand in terms of business and leisure voyagers.

Perhaps, the merging of the two carrier companies in an all-stock transaction was a sure way of sustaining the industry and preventing it from collapsing. According to the Chairman of British Airways, Martin Broughton, the merger of British Airways and Biers was a gripping, tactical and financial logic aimed at benefiting all stakeholders: cabin crew workers, travellers and shareholders.

On his part, the Chief Executive of British Airways retorted that the successful merging of the two carrier companies would bring competition among carrier companies. Once completed, the deal will see shareholders possess 56 percent of the shares and the remaining 44 percent to go to Iberia shareholders.

Financing the Takeover

The taking over of Iberia was not an easy task as the merger involved huge sums of money. British Airways had to look for modalities of raising the required US$9 billion in order to seal the deal. Luckily, the presence of private equity investors strengthened the surge to acquire Iberia and make it part of the Global Airlines empire. Initially, British Airways had approached numerous credit lending bodies with an aim of raising the required money for the financing of the deal.

The Spanish airline, Iberia has a market value of 3.74 billion Euros, which is an equivalent of US$5.1 billion. Additionally, being Spain’s largest carrier, the company dominated in Latin American routes. Thus, the deal was so good to loose pending the fact that some airline companies like that of France had shown interest.

The better aspect of the bid is that British Airways was under no obligation to add supplementary capital investment, as the bid engulfed everything. Throughout the bidding process, British Airways maintained confidentiality and it did not want to disclose information regarding private equity companies. Nevertheless, British Airways had to pay an initial of 3.4 billion Euros and then pay the rest later (Brothers, 2008. p.1).

The American firm, Texas Pacific Group (TPG) had managed to buy a stake in Iberia before the merger. Thus, just like the American firm, British Airways had an obligation to pay the initial bid of 273 million Euros. However, later on, British Airways went ahead to acquire one percent of America’s state in Iberia. This brought the major stake of British Airways in Iberia to ten percent, thus, making it the biggest shareholder at least according to data released by a research firm, Bloomberg (Rowley, 2010. p.1).

Implications for shareholders in both British Airways and Iberia

For the merger to be successful, both the shareholder and the acquirer must be satisfied with the takeover price and the mode of financing. The shareholders from the two carrier companies voted in favour of the deal. According to the two airlines, the move will expand their business empire and generate more revenue. This means that if the two carrier firms generate more revenue, the share price will automatically be affected and hence, dividends.

For instance, after the completion of the deal, the new company accumulated a combined market value worth 9 billion dollars. Without any further delay, the new company started trading in London and Madrid stock markets. Upon the completion of the deal, the shares listed in London stock market (British Airways) fell in price by 2.2 percent while in Madrid’s stock market, Iberia a single Iberia share traded at 3.18 Euros, which was 1.5 percent drop from the previous price (Rhys & Tracy, 2010, p. 1).

The shareholders from the two companies believed in the existence of a strategic rationale for the deal. In other words, the takeover would spawn twelve-monthly synergies of over 400 million Euros, which to them was a good deal. With such huge sums of money generated as revenue, the shareholders, workers and customers would greatly benefit.

Moreover, the shareholders believed that the British Airways/Iberia takeover would create on of Europe’s strongest airline company that will compete with other global airlines. This clearly demonstrated the synergetic effect where values of combined entities always exceed the cumulative value of individual entities. PV (A+B) = PV (A) + PV (B) + extra.

In addition, many people deemed the deal to reduce the market power characterised by competition, absence of barriers and minimal cross-subsidization. Thus, given this scenario, the probability of attaining financial synergy is high and shareholders will rest assured of their investments.

Undoubtedly, the two companies were bound to benefit a lot financially including saving 33 percent of the generated revenue. Additionally, the takeover highlighted positive advantages such as revenue management, networking and joint venture- things that will not only increase shareholder confidence but also generate more income for them.

Nevertheless, the two companies agreed to retain their respective brands and operations although their international market portfolio changed greatly. For instance, British Airways increased its accessibility to Latin America by entering 59 new destinations from the initial 13, while Iberia gained access of 98 new destinations under the auspices of British Airways (Brothers, 2008, p.1).

The relative successes of the takeover

So far, the British Airways/Iberia takeover has achieved great success. Undeniably, the new company has increased its operations and connections across Europe and South America. With over 400 million Euros generated each year as annual synergies, the new airline projects to compete favourably with other global airlines. The new airline group had also acquired additional 419 aircrafts and increased its flying destinations in and out of Europe by 205.

Noticeably, each of the two carriers has benefitted form the other through network accessibility. On the other hand, shareholders are perhaps the greatest beneficiaries of the deal pending the increase of the share price. The takeover has also led to profit announcements, increase in dividends and expansion of assets owned by the two carrier companies.

References

British Airways and Iberia sign merger agreement. 2010. BBC News. Web.

British Airways., 2010. Explore our past: 2000- Present. Web.

Brothers, C., 2008. . The New York Times. The New York Times. Web.

Marriott, L., 1998. British Airways. Vergennes: Plymouth Toy & Book.

Rhys, J. & Tracy R., 2010. British Airways and Iberia shareholders back merger. Web.

Rowley, E., 2010. The EC approves BA alliance with American Airlines and Iberia. The Telegraph (London). Web.

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