BA and Iberia finally land $7bn merger agreement

Agreement signed late last night after day of talks; British jobs to go in €400m cost-saving deal

British Airways last night confirmed that it will merge with the Spanish flag carrier Iberia in a $7bn (£4.2bn) deal, creating the world's third biggest airline. The announcement comes after a day when the boards of both companies were locked in separate meetings, combing through the fine details of the plans which have been under discussion for nearly 18 months.

Under the terms of a binding agreement signed yesterday, BA will take control of 55 per cent of the combined group, rising to 56 per cent when cross shareholdings held by the two companies are cancelled next year.

Willie Walsh, BA's chief executive will become the head of the new BA-Iberia, while Iberia's chief executive and chairman, Antonio Vazquez is set to be appointed chairman. The deal is expected to be signed in late 2010.

The two airlines will be operated separately under a new holding company, presently known as called TopCo, which will be a Spanish incorporated entity registered in Madrid and will be tax resident in Spain. The operating and financial group will be based in London. The shares will also trade on the London Stock Exchange. It had been suggested earlier that BA would have to concede London as the new group's headquarters to Madrid.

"This is a merger of equals and BA is very pleased that the group will be headquartered and listed in London," Mr Walsh said last night. "The merger will create a strong European airline well able to compete in the 21st century. Both airlines will retain their brands and heritage while achieving significant synergies as a combined force."

One potential sticking point had been BA's burgeoning pension deficit, which is thought to stand at about £3bn. Mr Walsh stressed that the BA operating company would be solely responsible for the deficit, answering "no, no, no," when asked if Iberia shareholders could become equally liable for the deficit once the deal was concluded.

BA's closest rival, Virgin Atlantic, last night warned that regulators needed to be alert to BA's growing dominance.

Earlier in the day both companies had heightened speculation that a deal was imminent by confirming that the board meetings were taking place in London and Madrid. The City was encouraged by news of an imminent deal yesterday afternoon, with BA's shares closing the day up 7.5 per cent at 215p.

Despite BA's far superior revenues, Chris Yates, an independent aviation analyst, said that BA was the major beneficiary of the merger. "It is clear that Iberia is the poor cousin in this arrangement. BA will get a significant boost from this deal, especially in relation to the Latin American market, where it has very little presence. There are also considerable synergies."

Mr Walsh said savings from the combination would reach €400m (£359m) by the fifth year of deal, warning that a number of jobs would be lost in Britain.

Both groups have been hit hard by falling demand air travel in the last 18 months, as well as by passengers' moving to low-cost airlines. BA in particular has struggled to attract high margin business-class passengers.

The deal comes after a number of aborted attempts by BA to forge mergers with other carriers. In the last year it has tried to form an alliance with Australian group Qantas, which collapsed soon after exploratory talks were opened, and with American Airlines. The AA discussions have continued, but are now being investigated by the various competition authorities, a hurdle the same deal has floundered on in the past.

Mr Walsh argued last night that while the BA and Iberia deal would require clearance, the two have been sharing popular routes between the UK and Spain for a number of years.

BA and Iberia: Marriage of convenience

The merger deal between British Airways and Iberia, which was finally signed last night after 18 months of talks, represents a personal triumph for BA's chief executive Willie Walsh after he was confirmed as group chief executive of the combined company. He can also claim victory by securing London as the holding company's new headquarters, even if the group will be incorporated in Madrid.

It had been thought that Mr Walsh's personal triumph would come at the cost of the BA-Iberia being run from Spain.

Antonio Vazquez, Iberia's chairman and chief executive, will be the chairman of the combined company after winning credit for having got the deal back on track after his appointment in July. BA's chairman Martin Broughton will be deputy chairman of the merged airline.

How a deal took flight

December 1999 BA and American Airlines take 10 per cent stake in Iberia as Spanish flag carrier is privatised

December 2003 Brussels gives green light for BA/Iberia operating alliance in the European Union

September 2004 BA's sale of £425m Qantas stake renews deal speculation

November 2006 BA buys out AA

March 2007 Texas Pacific Group makes tentative €3.4bn offer for Iberia. BA joins consortium, but the talks are ended in November

July 2008 BA admits it is in talks with Iberia about an all-share merger

May 2009 Iberia's concerns over BA pension stall talks

July 2009 Iberia chairman Fernando Conte quits, renewing hopes of a deal

November 2009 British Airways and Iberia announce deal

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