IAG cuts the value of Air Europa by 40% after the injection of 100 million

IAGthe airline holding company that acts as Iberia’s parent company, has been running for months what it hopes will be its third and last agreement to take over Air Europe three years after the original pact. The Spanish-British company has already injected 100 million euros over its eternal rival. In its balance sheet, it has already entered this injection as a financial asset and has made an adjustment to its fair value of just over 40% of the total borrowed.

The company run by the Spanish Louis Gallego picked up this update on the management report of the first six months of the year, where it delves into explaining that this financial asset now has a fair value of only 59 million euros, “which constitutes a decrease of 41 million euros since its formalization,” says the company in the report . The correction of the financial instrument appears as “net loss” in the company’s income statement, but company sources they deny that it is a devaluation of the loan nor the value of Air Europa and attribute this result to the chosen accounting formula.

Financial sources, for their part, explain that the correction suggests the still weak financial position of Air Europa, since the key to the method used to calculate this agreement is not the amortized cost -the usual one-, but the fair value. This is influenced by the price at which Air Europa would now lend that money, which would be much more expensive than that stipulated at the time of formalization. For this formula, IAG explains in its report that “it is valued using observable market data to determine an interest rate that a market actor would demand to grant a loan for the same term and amount.”

The injection of IAG into the parent company of Air Europa, Globaliawas carried out through an unsecured loan with a maturity date of 2029. The amount is 100 million and is, above all, convertible, with the objective of exchanging the debt for shares to become a shareholder of the airline. This is a first step to negotiate exclusively for the remaining 80% and not have other bidders flying over – Air France has already interfered at the start of 2022- during the following two years. After that period and without a closed agreement, rivals could enter the negotiation, but Iberia would always have the possibility of matching the best offer.

IAG’s accounting adjustment on the loan comes in the prelude to a new tough negotiation between the parties for the remaining percentage to be acquired, especially when Air Europa seeks to add value to its company. This has been evidenced on several occasions and has been verbalized again in recent weeks, Juan Jose Hidalgofounder of the company, who advises that will not “sell” its creation, especially now that it has begun to improve its operational performance after the pandemic, is recovering old routes and is already earning more than it spends.

It should not be forgotten that the price of Air Europa has suffered large variations due to the coronavirus crisis. In the original agreement of November 2019, the airline was valued at 1,000 million euros, but with the health crisis there was no choice but to renegotiate the agreement. And not only was the payment schedule modified, so that it would be more comfortable for Iberia to start amortizing the operation with the recovery of air traffic. The price also fell by halfremaining at 500 million euros.

That same percentage was respected in the last agreement announced in March, in view of the figures of the participatory loan, for which it was necessary the placet of the SEPI, a great creditor from the company since it was rescued by the pandemic, and from the Official Credit Institute (ICO). At the final agreed price, however, it is necessary to subtract 75 million euros already paid by Iberia when activating the break clause (break fee) at the end of 2021, a figure slightly higher than that stipulated at first (40 million euros).

A calendar and a ‘plan B’

To the negotiation for the remaining 80%, IAG must add the role of the regulator, who must be convinced of the benefits of an integration between two powerful companies. Brussels already saw with I suspect last year the sum of forces of both airlines on short and long haul routes, especially those to Latin America. In this regard, Javier Sanchez-PrietoIberia’s chief executive, explained at the last shareholders’ meeting that he was the time to better explain the operation to the authorities and study the proposed regulatory discharges to offset the merger.

In case the plan does not come to fruition, IAG works with alternatives once the plan A calendar has been exhausted, which has been set at 18 months. The foreign press or analysts have already placed other girlfriends as easy jet either ITA Airways, respectively. Also the CEO of Ryanair, who has been convinced that he will go for the Portuguese TAP. But Gallego explained in his appearance before journalists that his plan B would go through reinforcing some alliances that he already has in Latin Americawith agreements such as the one with the Colombian Avianca.