International Airlines Group (IAG) has agreed to buy Spain’s Air Europa for €500 million ($606.7 million), which is half the price tag offered back in 2019.
According to the revised agreement, IAG’s (IAG) subsidiary Iberia will acquire the entire issued share capital of Air Europa from Globalia. The deal value was slashed in half from the €1 billion proposed on Nov. 4, 2019. Additionally, the two parties agreed to defer the payment until the sixth anniversary following the completion of the deal.
The acquisition is projected to be earnings accretive in the first full year following its completion and generate significant cost and revenue synergies, with full run-rate synergies now expected by 2026.
“Both Iberia and IAG are demonstrating their resilience to face the deepest crisis in aviation’s history. Being part of a large group is the best guarantee to overcome current market challenges which will also benefit Air Europa once the transaction is completed,” commented IAG’s chief executive Luis Gallego. “I am pleased that we have reached agreement to defer payment until well into the expected recovery in air travel following the end of the pandemic and when we expect to be realising significant synergies resulting from the transaction.”
The transaction is still subject to satisfactory negotiations between Iberia and state-owned Sociedad Estatal de Participaciones Industriales (SEPI) regarding the non-financial terms linked to the financial support provided by SEPI to Air Europa during the coronavirus pandemic in 2020. On Nov. 11, Air Europa secured €475 million in loans for six years from SEPI to support its liquidity during the pandemic. As of the end of 2020, Air Europa’s financial net debt including the SEPI loans, amounted to approximately €500 million.
The deal is expected to be completed in the second half of 2021, pending approval by the European Commission.
Citigroup analyst Mark Manduca recently upgraded IAG to Buy from Hold with a price target of 195p, up from 150p as he views IAG as “the most solvent and sensible way” among EU airlines of participating in the North Atlantic recovery he sees happening over the next 12 months.
Manduca noted that IAG has significant exposure to both Norwegian and Virgin, which he believes will both be “shrinking in size.” (See IAG stock analysis on TipRanks)
The rest of the Street is in line with Manduca’s bullish outlook. The Strong Buy analyst consensus boasts 10 Buys versus 2 Holds. That’s with an average price target of 187.67p, which implies 18% upside potential to current levels.