View from City Road: BA makes a tricky landing

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The Independent Online
BRITISH AIRWAYS' dollars 750m investment in USAir might appear a high-risk means of gaining access to the world's biggest air travel market. USAir was not BA's first or even second choice as a transatlantic partner; it has lost dollars 1.16bn in the past two years and has debts of dollars 1.9bn.

Nevertheless, BA has agreed to pay a 20 per cent premium to USAir's share price for a 44 per cent equity stake in the knowledge that it may have to shell out a further dollars 300m to avoid dilution and will not be able to increase its voting rights beyond 25 per cent for the foreseeable future because of US regulatory restrictions.

That said, the deal has a number of attractions, from the point of view of both BA's balance sheet and its global ambitions. By taking its stake in the form of convertible preference shares, BA says it will be able to account for the transaction as an investment, avoiding any dilution for its own shareholders. Furthermore, BA is funding the investment from its own resources while the 7 per cent yield on the preference shares makes the deal self-financing.

From a strategic standpoint, BA could also have done a lot worse. USAir may not be the healthiest of American airlines but it has made strides in the past year to cut its losses and raise productivity, while the investment provided by BA will make it one of the better-capitalised US carriers. Moreover, there is little overlap between the two carriers in routes served.

The market threw all this into the melting pot and liked what emerged, marking BA shares up 10p to a close of 268p. That price can be justified provided USAir delivers its part of the deal and BA benefits from a following wind once the US elections are over.

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