European airline shares fell sharply yesterday after British Airways dropped plans to acquire a bigger stake in the Spanish carrier Iberia.
BA said it will not exercise its option to increase its stake in Iberia, possibly ending its 3.4bn (about £2.5bn) pursuit of the airline with its partner, private equity company Texas Pacific Group.
The move by the British airline clears the way for bank Caja Madrid to buy a 7% holding belonging to fellow Spanish lender BBVA. Airline industry analysts said the Spanish banks could build a powerful position to block any future TPG-BA bid.
BA said it would not buy any of the Iberia shares being sold by BBVA and Logista, a Spanish logistics firm and another major shareholder.
"British Airways' position as Iberia's key industrial partner remains important and is not dependent on an increase in shareholding," said Keith Williams, British Airways chief financial officer.
He added: "We will enter into discussions with Caja Madrid in order to maximise the value of our relationship with Iberia". In March, BA, which owns 9.95% of Iberia, made an informal takeover proposal for the Spanish airline with TPG.
But earlier this month, a group of Spanish investors announced that it would make a rival informal offer priced at 3.60-3.90 per Iberia share, compared with the 3.60 a share presented by British Airways. The Spanish partnership, which includes several prominent business people, is led by private equity group Gala Capital.
Gala's bid values the airline, Spain's largest and the market leader in Europe on flights to South America, at up to 3.7bn (about £2.7bn).
Caja Madrid has exercised an option to buy the stakes belonging to Logista and BBVA. However Caja is not part of the Gala Capital consortium.
There are five core shareholders in Iberia: BA, Caja Madrid with 9.9%, BBVA with 7.3%, Logista with 6.7% and El Corte Ingles with 2.9%, according to the British Airways statement.
Shortly after the BA announcement, officials at the Madrid Bolsa suspended Iberia shares at 3.14, when they were 1.9% down.
BA shares ended 16p, or 4.6%, lower at 329.75p in London dealing.
Shares in other European carriers lost ground in Paris and Frankfurt.
City analysts say Caja Madrid would prefer Iberia to remain independent or in Spanish hands as it fears a foreign-led takeover might reduce the international importance of Madrid as a hub airport.
They also said an Iberia tie-up would have given BA more muscle to compete with Air France and Germany's Lufthansa.
A tie-up would allow the use of Madrid as an alternative hub to overcrowded British airports such as Heathrow.
Iberia, Europe's fourth-biggest carrier in terms of passenger numbers, is also the leader on flights between Europe and Latin America with 20% of the market.
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