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A Shakeup in Europe's Skies

Texas Pacific Mulls an Iberia Bid

By Carol Matlack

The private equity firm may offer $4.5 billion for the Spanish airline in what could be a sign of renewed consolidation among European carriers.

In the 1990s, Texas Pacific Group shook up the U.S. airline business by leading a buyout and turnaround of Continental Airlines. Now, could the private equity outfit trigger a shakeup in Europe's skies? TPG confirmed on March 30 that it is considering a $4.5 billion offer for Spanish carrier Iberia, fueling speculation about a possible bidding war for Europe's fourth-largest airline.

TPG's interest underscores the potential for a new round of consolidation in European's airline sector. Just over a week ago, European Union transport ministers approved a so-called Open Skies agreement that for the first time will allow European carriers to operate flights to the U.S. that originate in cities outside their home countries. The agreement also makes it easier for European carriers to acquire airlines in other EU countries.

Even before the pact was signed, analysts have long figured Europe's big three airline -- Air France-KLM, British Airways, and Lufthansa -- would gradually absorb most of the region's smaller players. Air France has already tied up with KLM, and Lufthansa took over Swiss International Air Lines. Italy's troubled Alitalia is being eyed by several potential suitors, including TPG.

Stirring the Pot

Iberia seems an obvious target. Indeed, its shares have already soared more than 40 percent this year on persistent takeover rumors. The formerly state-owned carrier has undergone a major restructuring in recent years. And its extensive Latin American route system, "would make a good network fit" for any of Europe's three bigger carriers, says Andrew David Lobbenberg, a London analyst with ABN Amro. BA already owns 10 percent of the Spanish carrier, and they're both members of the oneworld alliance, along with American Airlines. Lufthansa said recently that it might also consider a bid for Iberia.

The prospect of a TPG bid has stirred the pot even more. According to a regulatory filing by Iberia, which BusinessWeek.com confirmed with TPG, the private equity group is considering an offer valuing Iberia's shares at €3.60, about 10% below the current share price of €4, or about $5.35. Iberia says its board will meet "in the next few days" to discuss the possible offer.

A takeover of Iberia wouldn't be simple. For one thing, BA has the right of first refusal on 40 percent of Iberia shares, because of agreements made before the airline was publicly listed. BA therefore could "repel a hostile bid, or force a consensual bidder to pay a higher price," Chris Avery, a London analyst with JPMorgan Securities, said in a recent research note.

Roadblock to Outright Control

Oddly, it might be easier for TPG than for one of the big European airlines to do a deal for Iberia. One reason: Bilateral treaties between Spain and Latin American countries would bar Iberia from flying to those countries if it were controlled by a non-Spanish owner. BA or another potential buyer could get around such restrictions by using a "buy now, control later" strategy, as Air France did when it acquired KLM. But, says Avery, "We do not believe that BA has the stomach to explain to Anglo shareholders how it has paid a signficant premium for an asset over which it may not have control." Moreover, Lufthansa could face antitrust problems because it already has an alliance with the No. 2 Spanish carrier, Spanair.

TPG, because it's not an airline, wouldn't face such difficulties. True, it couldn't control Iberia outright because of the Latin American treaties. But it could round up Spanish investors to join its bid. That shouldn't be hard, thanks to the real estate boom fueling economic growth in Spain. "There's a lot of money floating around," says Dan Solon, a Barcelona-based aviation consultant.

Certainly, TPG has already proven itself an astute investor in airlines. Besides a stake in Continental, which it bought in 1993 for $70 million and sold five years later for 10 times that amount, the group also invested successfully in America West Airlines and was an early investor in Irish discount carrier Ryanair. TPG chief and founding partner David Bonderman is non-executive chairman of Ryanair.

Cost Cuts Could Spark Protest

But some of its recent targets look more challenging. TPG joined a consortium with Australia's Macquarie Bank that made a $9 billion bid for Qantas Airways, but the deal was rejected by the Australian carrier's owners on March 23. Alitalia, another potential target, is a financial basket case.

While Iberia is profitable, it's under increasing attack by low-cost airlines flying into its Madrid hub. Further cost-cutting is needed, but that could spur labor protests, which could be magnified if Iberia is acquired by a foreign owner, JPMorgan's Avery says. TPG has clearly put itself on the runway, but it's too soon to say whether a deal for Iberia will take off.

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