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IB Is The Major Shareholder Of BA  
User currently offlineDme From Portugal, joined Mar 2004, 110 posts, RR: 0
Posted (5 years 9 months 1 week 4 days 23 hours ago) and read 6106 times:

Dear All,

I have not seen a post related to this so I think interesting to share.

According to financial newspaper "Expansión" (http://www.expansion.es/2008/10/23/empresas/1224797514.html?a=4b383159253dfeff3b2a00da8fb3ec15&t=1224833215), IBERIA is the major shareholder in BRITISH AIRWAYS. It seems that two days ago, the 22nd, IB reached about 9% of the total shares of BA, a percentage bigger that that of Standard Life, which is about 8%. It could be possible that IB could increase that number in the next days. In turn, BA posses about 13% of IB. Surprisingly, this week the shares of IB increased about 35%.

I suppose that this movements are related to the BA/IB fusion so that the two companies can exchange shares as if their value were more or less of the same importance (unless BA withdraws of the fusion). Sometimes it seems that the bride (IB) has forced the groom (BA) to marry (fusion) but the groom is not convinced yet.

Regards,
Dme.

Pd. Would it be possible that CATHAY could enter in between the BA/IB fusion, either to fuse with BA or with both BA/IB?. I suppose that IB should move quickly since BA shares are rather low. I think it would be possible that IB could increase the shares in BA so that no other company could bother the BA/IB negotiation.

[Edited 2008-10-24 00:59:04]

6 replies: All unread, jump to last
 
User currently offlineAisak From Spain, joined Aug 2005, 762 posts, RR: 10
Reply 1, posted (5 years 9 months 1 week 4 days 17 hours ago) and read 5746 times:



Quoting Dme (Thread starter):
I suppose that this movements are related to the BA/IB fusion so that the two companies can exchange shares as if their value were more or less of the same importance (unless BA withdraws of the fusion).

Actually BA and IB are more or less the same regarding their value. No matter whay the stock exchanges say about their price (we know the real value of a company can differ from the one listed), BA and IB represent the same money. BA is obviously bigger but they have a huge debt called "pension funds" which does not exist on the spanish side of the equation.


User currently offlineR2rho From Germany, joined Feb 2007, 2587 posts, RR: 1
Reply 2, posted (5 years 9 months 1 week 3 days 16 hours ago) and read 5299 times:

IB own options for up to 9.99%, and they are executing them as already announced. If they wanted, they could go beyond that, and if they wanted, they could force a merger of equals upon BA. One thing's for sure, if we haven't heard any news since the merger announcement, its because there's some tough negotiations going on.

Quoting Dme (Thread starter):
Sometimes it seems that the bride (IB) has forced the groom (BA) to marry (fusion) but the groom is not convinced yet.

Though a rumor, it is widely believed that it happened in just that way, when IB secretly bought options for up to 10% of BA and basically told them something like "we virtually own 10% of your company, either you sit down and start talking about a merger or you exit our company and we exit yours, so we can go our own way."


User currently offlineGatoVolador From Spain, joined Apr 2007, 435 posts, RR: 1
Reply 3, posted (5 years 9 months 1 week 3 days 11 hours ago) and read 5095 times:



Quoting R2rho (Reply 2):
IB own options for up to 9.99%, and they are executing them as already announced.

I'm not sure, but I guess that Iberia could have bought the stocks directly and not through the execution of call options, basically due to the low prices of the BA share during the last month. Iberia could have sold the call options in the free market or even retained them.

Quoting R2rho (Reply 2):
If they wanted, they could go beyond that

This is the problem, indeed!

The Spanish law of limited companies says that cross ownership is limited to a 10% of the capital to avoid undercapitalisation. That's why Iberia just bought a 10% and not more. This affects Iberia but also their dominant companies: Caja Madrid, El Corte Inglés, and British Airways.

I already suggested some feasible ways to skip this limitation in other forums. Let's say if somebody reads me, but I don't think so. hehehe.

Legal limitations aside, Iberia could have perfectly become a dominant shareholder, but it seems that everybody neglects this fact, particularly outside Spain, where Iberia is the misterious unknown airline.

Quoting R2rho (Reply 2):
and if they wanted, they could force a merger of equals upon BA.

Iberia already achieved to have the 50% of the political power of the new holding (50% of the representatives in the board) but also a 50% of the economical power (dividends). Even UBS, that is the expert advisor of BA, accepted this and agreed to sign a report when they say that, according to their data and valuation of the airlines, Iberia needs to represent a 50% of the new holding, both politically and economically.

This is because the experts (UBS and... Merril Lynch?):

- forecasted that Iberia will generate more profits than BA for at least two years, and that in the third year they will generate a similar amount;
- valuated in +2.500M€ the costs of the pension funds of BA. If somebody wanted to buy BA, he/she would discount this quantity to the value of the assets, and then, Iberia and BA have the same value (even neglecting the input that Iberia has +2.500M€ in cash);
- considered that Iberia is the best prepared privately-owned airline in the world to survive the crisis. Only Singapore Airlines and somebody else in Asia (whose name I forgot) are in better shape, but.... these airlines are state-owned or receive subsidies / government help / privileges. British Airways is number 7 in the list.
- agreed that Madrid-Barajas' T4 is the airport that will ensure the growth of the holding, since LHR is slot-restricted. These slots are very valuable.
- understand that Iberia still has a lot of revenue generation potential. For example, the MRO business is booming, and short haul is also recovering from losses after the Vueling-Clickair reorganisation. Vueling already posted some profits (prior to the merger!), and finally Iberia will achieve to make money in short haul versus the considerable losses of this area. I would also add that the intercontinental business is still very focused on Latam, and still has a lot of growth potential. I'd also say that Iberia's CFO (Mr. Dupuy de Lôme) is one of the most clever executives in the industry, and has achieved a grade of flexibility which is amazing. The way IB manages its fleet (and the way they will manage it from now) is extraordinarily good to skip losses, versus the rigidity of the fleet ownership of BA, and will reduce the maintenance costs and keep the fleet constantly young and updated to the needs (à la Ryanair).

Now the question is if the shareholders of BA will accept the reports --even their own reports-- or not. Of course, they could reject the 50-50% deal if they consider that this is not good for their interests. Iberia is respecting this, but they will not accept less than a 50% if both companies finally reach an agreement.

The "junior partner" theory is wrong, as I said here:
http://www.airliners.net/aviation-fo...al_aviation/read.main/4085545/1/#1
(see the last comment of reply #89)

and here:
http://www.airliners.net/aviation-fo...eneral_aviation/read.main/4145063/
(reply #1)

As a shareholder, I would like to see my purchasing "plans" (with strategies to skip the 10% limit) come true, but... unfortunately I see Caja Madrid approaching BA in the too much friendly way. Iberia has the potential to control the holding, but I think that they are opting for a sincere, generous, and true 50-50% partnership.

Anyway, at least the accepted "junior partner" theory was closed forever.


User currently offlineR2rho From Germany, joined Feb 2007, 2587 posts, RR: 1
Reply 4, posted (5 years 9 months 1 week 2 days 18 hours ago) and read 4754 times:



Quoting GatoVolador (Reply 3):
The Spanish law of limited companies says that cross ownership is limited to a 10% of the capital to avoid undercapitalisation. That's why Iberia just bought a 10% and not more.

Can you explain this limitation? I don't see why IB couldn't own more. Or at least match the 13% that BA owns?

Quoting GatoVolador (Reply 3):
Anyway, at least the accepted "junior partner" theory was closed forever.

I hope you're right on that, because there is no reason why IB should be considered as that.


User currently offlineGatoVolador From Spain, joined Apr 2007, 435 posts, RR: 1
Reply 5, posted (5 years 9 months 1 week 2 days 13 hours ago) and read 4554 times:



Quoting R2rho (Reply 4):
Can you explain this limitation? I don't see why IB couldn't own more. Or at least match the 13% that BA owns?

Explaining the reason of such a limitation is a bit difficult, so let me use an example.

Imagine that you have one firm –call it “A”—, whose only two assets are one building and 100 in cash. Now imagine that this firm decides to expand, and borrows 200 to open a business abroad. Unfortunately, the firm ends up with losses, runs out of cash, and asks for bankruptcy, having to open a liquidation process. In this case, the bank that lent the 200 knows that this firm has some assets –the building, basically—that the managers in charge of the liquidation will be allowed to sell in case of bankruptcy, an that with the sale of these assets, “A” will raise some money and will pay the debt back (at least partially). As you see, the obligations of the firm are backed by some assets.

Now imagine a different case with two firms –“B” and “C”—, where the assets of B are a building and a 25% of C; and the assets of C are a building and the 25% of B. (Here, there is a cross participation, because B owns a part of C and the other way around.) What would happen if C was affected by the low business-cycle and ended up filling for bankruptcy? In that case, the creditors of C would ask the liquidators of B to sell the building and also the shares of B owned by C but… hey… do you see that this is a circle? The value of the stake in B is also making reference to the assets of C, which now is under liquidation and has “no value”.

If you ever allowed cross ownership with no limits, you’d need to face the problem of having no (real) assets that could back the obligations of the insolvent company. This is the reason of this kind of limitations.

If Iberia owned BA and BA owned Iberia, at the end, the obligations of Iberia would be backed by the assets of BA, which at their turn would be backed by the assets of Iberia. This is nonsense, and that’s why the legislator banned this kind of cross participation exceeding the 10% of the capital: as a way to protect the creditors from a virtual capitalization caused by cross ownership.

Of course, there are ways to skip this limitation, but despite of them, this legal barrier is stopping Iberia to grow more. Otherwise, I’m sure that they would have gone beyond. In addition, as I said before, the approach to BA is in the friendly way. I don’t know why, Iberia is too confident that they will achieve their goal, which is representing a 50% of the new holding company. Personally, I wouldn’t be that sure (the shareholders of BA maybe could consider that this is not a good deal for them), and I’d have gone beyond. Skipping the legal limitation is tough, but you can do it. And Iberia has the purchasing power to control the new parent company, now that …:

-----> (1) Iberia has more than 2,5 billion in cash (and could raise more);
-----> (2) the market value of BA is less than 2 billion (… and that Iberia could have bought up to a 30% of BA at market prices with no need to launch a 100% takeover, and considering that with a 30% you can control BA from the minority, as the current core shareholders do); and
-----> (3) Most of the core shareholders of BA are in troubles due to the financial crisis (see the case of some banks, insurance companies, and funds) and some of them want to leave or could be convinced to leave. See the case of Invesco –which was BA’s first shareholder (12%)—and who sold in the last two months a significant part (more than one half) of its stake, even though the stock price of BA is now at its minimums.

In my opinion, Iberia and its shareholders have a goal, which is being part of a new merged top European (within the top 3) airline, able to have a "global" dimension, and that could face the Euroatlantic wave of mergers that will come in the next months/years, (... and here AA plays a role). I personally think that Iberia doesn't want to be swallowed by somebody, becuase they have pretty decent size and an outstanding financial situation, but they would rather like to be part of the new company, and that's why the shareholders committed to stay in the new company (Caja Madrid would be the first shareholder), and that's why Iberia wants to have a decision power in the new board (50% of the representatives), and also an equivalent economical power (50% of the dividends). As Fernando Conte said, it's not BA taking over Iberia, it's BA and IB creating a new parent company that will own and manage two --unchanged, from their brand and philosophies point of views-- airlines. It's a deal à la AF-KLM, but here BA and IB have to be considered as equals, and both part of the new company, not just like AF did: keeping the KLM brand but managing the company from Paris as a new branch of Air France.

They could have gone beyond, but maybe they don't want to make the process too tense (the airline business is one of the most sensitive to mergers due to the power of the unions, governments, the importance of national identities, etc.). The merger talks started because IB pushed BA to do that with the entry of IB in the capital of BA, that's for sure, and this was a pretty hostile movement of Iberia, and probably the way to restore the reciprocal confidence and friendship is to push BA but not too much. And if the were ambicious, they could have gone beyond this 10%, but my guess is that they really believe that the merger upon equals is possible and this is their behavioral reference (they don't want to "dominate", just co-operate in the creation of a 50-50% owned new company with two branches and a European "nationality").

I'm not sure that this is the best option. Why conform yourself with a 50% (subject to an agreement with the shareholders of BA, which is a pretty uncertain scenario for Iberia) if you could go beyond no matter the others think? I don't know if they really want to be too diplomatic, but I think that this bet is too risky for Iberia, as in the past BA was really reluctant to any kind of co-operation (not even merger possibilities but just close co-operation), and... I'm not sure if now BA is really committed to the idea of a new merged parent company. Is Iberia realistically confident that their 10% is enough to ensure a favorable merger for their interests?

As I already said in other threads, British Airways is lucky to have Caja Madrid as the main shareholder of Iberia, because CM is being really nice with BA, not only letting BA to takeover Iberia (which never materialised), but also resuming the trials to co-operate after the withdrawal of this takeover, and also now that they pushed IB to force the merger through the secrete purchase of a 10% of BA (but limiting Iberia's aggressiveness towards BA and making the deal the less hostile they can). If the main shareholder had been any other, I'm sure that they would have looked only for their own interests, no matter what the others think.


User currently offlineR2rho From Germany, joined Feb 2007, 2587 posts, RR: 1
Reply 6, posted (5 years 9 months 1 week 1 day 9 hours ago) and read 4225 times:



Quoting GatoVolador (Reply 5):

Thanks for the explanation, I got it now. I wonder if there is no such limitation in the UK or if it is more flexible, since BA owns 13% versus IB's 10%...


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