The proposed merger of British Airways and Iberia may be heading for the rocks, after the UK carrier warned it was not prepared to merge with its Spanish counterpart on the basis of current market valuations for the airlines.
The market value of Iberia on Thursday exceeded that of BA for the first time since the carriers began merger negotiations last July to form the third largest European aviation group. The relative valuation of BA has been hit not only by the slump in its share price but also by the sharp decline of the pound against the euro.
"The present valuation was unacceptable. Our shareholders would not accept it," Willie Walsh, chief executive of BA, said in Hyderabad during a visit to India. He added that Iberia is currently "over-priced", and declared he would rather walk away from the £3.5 billion tie-up if the ownership split is to be based on recent share valuations.
The Iberia share price had "performed well in recent times", he said. "We will look at this in the negotiations. That work is still to be done."
When the merger talks between the two began at the end of July, the respective market capitalisations indicated a share exchange ratio of 65 per cent for BA and 35 per cent for Iberia. The ratio has plunged to only 49.6 per cent for BA and 50.4 per cent for Iberia.
Asked specifically, Walsh said a merger ratio of 53 per cent for BA and 47 per cent for Iberia was "unacceptable", but refused to indicate what level BA shareholders would support. Disagreement over valuation was one of the factors that led to the collapse last month of the merger talks BA held with Australia's Qantas.
Iberia has also struggled to understand the implications of the rising deficits in BA's pension schemes. It is due to receive a report by financial consultants Mercer by the end of the month. Iberia executives have acknowledged a 50:50 equity distribution would not reflect the true value of BA, but it is determined to make the most of the market turbulence to get a good deal.
Walsh, during a press conference in Tokyo last November, had said half-year profits at BA had fallen 91.6 per cent, adding that the period would "be remembered as one of the bleakest on record". Airlines have been hurt by record fuel prices last year as well as the economic downturn hitting passenger numbers.