(Bloomberg) -- British Airways parent IAG SA said it’s abandoning a plan to buy Air Europa, the second time it tried unsuccessfully to take over the Spanish carrier, after finding that regulatory opposition didn’t provide a viable path to completing the transaction.
The company will pay Air Europa parent Globalia €50 million ($53.9 million) as a termination fee and will be left holding a 20% minority equity stake in Air Europa acquired two years ago, according to a statement on Thursday.
“The board of directors has concluded that in the current regulatory environment it would not be in the best interests of shareholders to continue with the transaction,” IAG said.
The €400 million transaction had teetered on the verge of collapse after European Union officials pushed back on concessions aimed at clearing the deal. Among contentious points, EU watchdogs were skeptical that an offer from IAG to open up certain short and long-haul routes to rivals fixes their anticompetitive concerns.
The European Commission was concerned the purchase would increase fares and reduce the quality of services for passengers, Margrethe Vestager, the body’s executive vice-president, said on Friday in a statement. The remedies which IAG submitted were not enough to address the commission’s competition concerns, she said.
“The merger would have negatively affected competition on a large number of domestic, short-haul and long-routes within, to and from Spain on which the two airlines compete closely,” Vestager said.
IAG rose as much as 6.7%, its biggest gain in a year. The stock has advanced 9.6% so far in 2024.
IAG had made some concessions to salvage the deal a second time after an earlier attempt was thwarted by intense scrutiny from regulators. The breakdown contrasts with Deutsche Lufthansa AG’s successful takeover last month of a stake in Italian carrier ITA Airways, the successor to Alitalia, which opened a path to an eventual takeover of the rest.
Madrid Hub
The green light for that transaction was seen as a possible sign that IAG would also be granted approval with its purchase. But Brussels regulators have ramped up their scrutiny of large airline deals — increasingly calling for robust concessions in order to get acquisitions cleared. That’s slowed consolidation in a market that remains more fragmented than in the US.
The company will continue to evaluate other opportunities for acquisitions, including in neighboring Portugal, where state-owned airline TAP is potentially coming up for sale, IAG Chief Executive Officer Luis Gallego said on a call with reporters. The company will hold onto its stake in Air Europa for now, he said.
IAG, which also owns Aer Lingus and Iberia, had wanted to buy Air Europa to help bolster Madrid as an aviation hub and compete with Europe’s largest airports. Some investors were skeptical of the transaction’s merits, given IAG’s significant debt load of about €6.4 billion. Gallego said he’s offered to transfer 52% of Air Europa frequencies last year, but that it wasn’t enough to sway watchdogs.
“It’s a pity we cannot do this operation,” Gallego said. “That doesn’t change our strategy to develop Madrid as much as we can.”
The airline group said separately that it will reinstate an interim dividend of 3 cents. IAG last made a payment in late 2019, months before the global pandemic grounded airlines around the world and destroyed their balance sheets. While the company had pledged to make payouts soon, it didn’t provided a time frame for when it might do so.
Alex Irving, an analyst at Bernstein, called the dividend reinstatement “cold comfort” on “a sad day” because the Air Europa transaction would have been “a highly appealing deal in our view.”
“Welcome at the margin, but always on the cards before too long,” he said of the dividend announcement.
Some rivals have already announced dividends again, including discount specialist Ryanair Holdings Plc, which committed to its first-ever regular payout in November. Deutsche Lufthansa AG said in March that it would pay 30 cents a share for 2023. Rolls-Royce Holdings Plc said on Thursday that it would also resume payouts to shareholders, underscoring how the broader aviation industry has healed from the pandemic.
IAG also reported earnings for the second quarter. Adjusted net income came in at €909 million, ahead of analyst estimates of €814 million. Revenue of €8.3 billion was in line with estimates. The company said it’s generating significant free cash flow and plans to take 20 new aircraft this year, with 27 coming in 2025.
(Updates with European Commission statement. An earlier version of this story was corrected to fix the dividend payout)
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