There’s a pretty big `if’ hovering over British Airways’ proposed merger with Iberia:
Iberia will be entitled to terminate the merger agreement if the outcome of the discussions between British Airways and its pension trustees is not, in Iberia’s reasonable opinion, satisfactory because it is materially detrimental to the economic premises of the proposed merger.
Remember BA has a circa £2.6bn pension deficit which has proved a sticking point throughout its 16-month long merger negotiations with the Spanish carrier. What’s amazing about this merger then, is that the memorandum of understanding has been issued without the pension issue having really been resolved.
British Airways pension trustees undertook a triennial review of the pension scheme in March this year, with the results due to be announced by June 2010. The finalisation of the repayment plan — which involves how much the airline will actually have to pay out for its pension plan — is due to be completed in June 2010.
The discount rate used by the trustees to calculate the pensions’ liabilities should now be carefully watched — there’s been a hint within the markets that they may use a favourable one. After all, it’s probably in the trustees’ interests that a merger goes through.
The (very small) bright side is that if Iberia does pull out because of pension issues, it will have to pay BA £20m:
Under the terms of the MOU the parties have agreed that a break fee of €20million will be paid in certain circumstances. The break fee provisions will also be reflected in the merger agreement.
Err, good thinking BA.
Related links:
British Airways defies financial gravity – FT ALphaville
British Airways pension tension – FT Alphaville
British Airways’ cash conundrum – FT Alphaville