Sorry for the morbid headline. We just thought we’d add a bit more detail on the death of the BA-Qantas merger.
FT Alphaville noted yesterday that there were two major sticking points to a BA/Qantas tie-up: the British carriers’ ballooning pensions deficit and the potential split of value in the consolidated airline. Bloomberg is now reporting the following:
British Airways Plc said merger talks with Qantas Airways Ltd. were called off after the carriers failed to agree on who would control the new company.
The negotiations were halted after British Airways Chief Executive Officer Willie Walsh and his Qantas counterpart Alan Joyce couldn’t reach agreement on the ownership split, Tony Cane, a spokesman for the London-based carrier, said today…
Disclosure of the negotiations “had created unrealistic expectations about a ratio that could never have been delivered given the two relative values of the airlines,” spokesman Cane said by telephone.
Are they suggesting the public announcement of the talks is what scuppered the deal? Is that why Qantas makes a point on its website of saying additional disclosure rules under the City Code on Takeovers and Mergers are no longer necessary? Regardless, this is a sudden and rather surprising deterioration. As late as Dec. 15 the two carriers, publicly at least, were still looking at a merger of equals. Other sources said Qantas was looking for a 5 per cent premium.
Ownership structure of the deal was always going to be a hurdle and many analysts were questioning the viability of the tie-up — and motivations for it — from the start. Especially given that BA was already in talks with Spain’s Iberia — a deal that would have made more sense given geographical proximity and complimentary route networks.
Clearly both airlines, but BA especially, are lagging behind competitors in terms of airline consolidation. In Europe in particular, BA has been leapfrogged by the likes of Air France and Deutsche Lufthansa. Protecting the Joint Services Agreement, which is up for renewal in 2010, between the two carriers would also have been a consideration on BA’s part. But — there’s also a hint of something more strategic here, from Citi airline analyst Andrew Light’s note yesterday:
Perhaps Qantas is being used as a ‘stalking horse’ to force Iberia management and its main shareholders to come back to the negotiating table with BA. First announced last July, these negotiations have stumbled, due primarily to BA’s pension deficit…
Also:
It seems Qantas was the one that first approached BA last August. This may well have been prompted by BA and Iberia’s joint announcement in July. Qantas has previously been associated with several partners, including Air New Zealand (ruled out by regulators), Cathay Pacific, Emirates, Malaysia Airlines and Singapore Airlines - of which the last has received the most media attention. Perhaps Qantas’ flirtation with BA is intended to ‘flush out’ those other airlines that are really interested in pursuing a merger with Qantas.
Light for one, didn’t think there was much to these ideas. There might not have been, but the deal’s failure today will certainly push those two issues into the spotlight. BA-Iberia remains possible, although the Qantas episode is likely to have soured relationships between the two further. BA is also still pursuing antitrust immunity with American Airlines, which would allow the two to share revenue on trans-Atlantic flights. Failing that, a surprise bid for Aer Lingus, or a not-so-surprise play for BMI (from Lufthansa) could also be on the cards.
As for Qantas, that much-speculated merger with Singapore could still be on the horizon. In fact, it would probably make more sense than a BA deal, though it faces some hurdles, as Light notes:
Merger synergies would likely be greater than in a merger with BA because there is greater route overlap and the closer proximity of Singapore to Sydney could enable greater cost synergies. On the negative side, regulators could well reject such a combination because the two airlines would virtually have a monopoly on all routes from Singapore to Australia and they would dominate Australia to Europe routes, where Qantas and Singapore Airlines are already the largest and secondlargest carriers on the route. In addition, Singapore Airlines’ much larger equity market capitalisation than BA and Qantas would imply that Qantas’ management role in a combination would be diluted.
Mergers with New Zealand (again), Emirates, Malaysia or Cathay Specific have also been bandied about.
In any case, both of these flag carrier airlines will need to get over their M&A sticking points and play catch-up in the airline consolidation game.
Related links:
British Airways’ pensions puff - FT Alphaville
BA and Qantas merger talks fail - FT
