British Airways owner IAG (IAG.L) said it has slashed the price it was going to pay for Spanish airline Air Europa by €500m (£443m, $606m), and will not make the payment until six years after the deal is complete, as the coronavirus pandemic takes a major toll on the travel sector.
IAG shares were up around 0.5% on Wednesday morning.
The original deal was made in November, 2019, under which IAG’s subsidiary Iberia was to acquire the issued share capital of Air Europa, owned by Globalia.
Now, the terms have been amended, and the parties have agreed that the amount will be reduced from an equity value of €1bn to €500m, “with payment deferred until the sixth anniversary of the acquisition’s completion.”
IAG expects the payment deferral to coincide with 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,” according to its CEO Luis Gallego.
Assuming satisfaction of all conditions, completion of the deal, subject to approval by the European Commission, is expected to take place in the second half of 2021.
“The board of IAG continues to believe that the acquisition remains strategically important for the future of IAG and Iberia and positions the group to benefit from growth opportunities as the industry emerges from the unprecedented impact of the COVID-19 crisis,” IAG said in a statement.
Susannah Streeter, senior investment and markets analyst, at Hargreaves Lansdown said IAG “has had its eye on the Air Europa prize for some time, but given its severe cash flow crisis brought on by the pandemic, had been negotiating hard on the terms.”
The deal now is an impressive one to pull off, she said, adding that “it not only shows how desperate Globalia was to offload the carrier, but how the board at IAG clearly expect a rebound in passenger numbers across Europe and beyond once the pandemic eases.”
“The global travel industry is expected to take until at least 2023 to reach pre-pandemic levels, but on that trajectory stumping up the cash should not be too onerous another three years down the line,” she noted.
The gross assets of Air Europa at 31 December 2019 were €967m, when it posted revenue of €2.1bn and operating profit of €71m.
The airline currently has an operating fleet of 52 aircraft, compared to 68 at the end of 2019.
Air Europa operates domestic and international flights on European and long-haul routes to Latin America, the US, the Caribbean, and North Africa.
According to IAG, benefits of the deal include increasing the importance of its Madrid hub, transforming it into a “true rival” to Amsterdam, Frankfurt and Paris.
“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,” Gallego said.
The news comes as the travel industry takes a major hit from the coronavirus pandemic. In fact, IAG was the worst performing FTSE 100 (^FTSE) stock of 2020, according to data compiled by stockbroker AJ Bell.
The onset of the COVID-19 pandemic brought international travel to a virtual standstill in early 2020 and flight volumes have struggled to recover ever since.
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