International Consolidated Airlines Group (IAG.L), the owner of British Airways, has agreed to acquire Air Europa, a private Spanish airline, for 1 billion euros ($1.12 billion) in an all-cash deal that will be accretive to earnings in the first full after completion.
The takeover will be funded from external debt, adding 30 basis points to the firm’s net debt to earnings before interest, tax, depreciation, and amortization ratio of 1.2 times as of the end of the third quarter, according to a statement. The purchase of Air Europa from Globalia, a Spanish tourism firm, will also be accretive to return on invested capital within four years after the completion of the deal.
Apart from offering “significant” potential for lower costs and higher sales after the merger, the move also enables the group to “transform” Madrid, Spain, into a strong competitor to the four biggest hubs in Europe – Amsterdam, Frankfurt, London Heathrow, and Paris Charles De Gaulle.
“This is of strategic importance for the Madrid hub, which in recent years has lagged behind other European hubs,” said Luis Gallego, chief executive officer of Iberia, a Spanish airline owned by the group. Following this agreement, Madrid will compete with other European hubs “with a better position on Europe-to-Latin America routes” and can become “a gateway between Asia and Latin America,” Gallego said.
Air Europa flies to 69 destinations, including European and long-haul routes to Latin America, the US, the Caribbean, and North Africa. The Spanish carrier, which carried 11.8 million passengers last year on a fleet of 66 aircraft, reported an operating profit of 100 million euros on sales of 2.1 billion euros in 2018.
Synergies across selling, general and administrative expenses, procurement, handling, and distribution costs are expected to be achieved by 2025. The group said it anticipated the implementation costs of the acquisition to be phased over the same period.
The deal, which involves a break fee of 40 million euros, is set to be completed in the second half of next year.