National Interests Sink Iberia Bid

National Interests Sink Iberia Bid

TPG, BA Shut Out
As Spanish Bank
Plans to Buy Stakes

By DANIEL MICHAELS in Brussels, KEITH JOHNSON in Madrid and ROD STONE in London
November 27, 2007; Page A13

The collapse of a bid by U.S. investment firm TPG and British Airways PLC to acquire Spanish airline Iberia Líneas Aéreas de España SA shows that despite efforts to liberalize global aviation, nationalism can still trump capitalism.

BA, which owns 9.95% of Iberia, said yesterday it won't exercise rights as a core shareholder to buy the stakes of two other core shareholders. That decision frees a fourth core shareholder, Spanish bank Caja Madrid, to buy those stakes and become Iberia's largest shareholder, with 23.9%.

Caja Madrid's move effectively stops a takeover bid for Iberia that was being prepared by a consortium including TPG, BA and three Spanish investment groups. TPG in late March made a preliminary offer for Iberia of €3.41 billion ($5.06 billion), or €3.60 ($5.34) a share, and soon after assembled the consortium. The group was hoping to make a formal bid for Iberia within weeks, but those plans are now abandoned, the group said in a letter to Iberia's board that the investors released.

State-controlled Caja Madrid was able to upset those plans last week with its surprise announcement that it would augment its 9.9% in Iberia by buying out two other investors. Regional politicians who control the savings bank said the purchase would help preserve Iberia's "Spanishness" and keep Madrid's Barajas Airport as a busy hub.

Spanish bank Banco Bilbao Vizcaya Argentaria SA and tobacco distributor Compania de Distribucion Integral Logista SA agreed to sell Caja their respective stakes of 7.3% and 6.7% for undisclosed prices.

Keith Williams, BA's chief financial officer, said in a statement that BA now "will enter into discussions with Caja Madrid in order to maximize the value of our relationship with Iberia." A BA spokeswoman declined to say whether the talks might include BA selling its stake in Iberia to Caja Madrid. A Caja Madrid spokesman wasn't available for comment.

Caja Madrid's move appears motivated more by political concerns than economic ones. Had the bank let various bidders battle it out, it could have seen a substantial rise in the value of its Iberia stake.

However, Madrid's regional government owns Caja Madrid. Iberia's largest hub is Madrid's Barajas Airport, which accounts for about 10% of the region's economic activity. Some local observers have worried that Iberia and Barajas could face cuts in foreign hands.

"Caja Madrid isn't acting out of purely financial interests here. They have other concerns to balance as well," said Joaquin Garcia-Romanillos, an analyst with Portuguese bank BPI in Madrid.

The world is littered with cross-border airline ventures scuppered by opposition or regulations based on national interests.

Although the European Union has been removing internal barriers to airline ownership within the 27-country bloc since the 1990s, many countries have been loath to let go of their flag carriers.

In the U.S., an effort by aviation regulators last year to slightly loosen rules on foreign control of U.S. carriers' commercial operations met broad opposition from U.S. airlines and their labor unions, which feared increased competition. The proposal was withdrawn.

European carriers BA, the former KLM Royal Dutch Airlines NV and Scandinavian Airlines System over the last 20 years invested in U.S. rivals Northwest Airlines Corp., US Airways Group Inc. and Continental Airlines Inc. All exited later when efforts to deepen the links hit obstacles.

Richard Branson's recent efforts to establish a budget carrier in the U.S. were stymied for several years on similar grounds by U.S. carriers and airline labor unions that feared the impact of increased competition. He finally started Virgin America this year.

A few cross-border airline deals have recently gone through. Air France SA acquired KLM in 2004 to create Air France-KLM SA, using a complex holding-company structure that initially faced legal challenges in Japan and some other countries. Deutsche Lufthansa AG in 2005 used a similar vehicle to acquire Swiss International Air Lines. In both cases, the target carrier wanted to be acquired and lobbied domestic constituencies hard to support the deals.

--Jason Singer and Marietta Cauchi in London contributed to this article

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