UPDATE 2-IAG offers to buy Vueling to tackle Spanish troubles

Thu Nov 8, 2012 11:46am EST

* IAG makes 7 euros/share offer for rest of Vueling

* Offer comes a day before IAG expected to cut jobs in Spain

* Vueling shares up 25 pct, IAG shares 0.8 pct down

By Rhys Jones

LONDON, Nov 8 (Reuters) - British Airways and Iberia owner IAG has offered to buy the rest of low-cost airline Vueling in a bid to stem losses in Spain and shake-up its short-haul business in the country.

IAG said on Thursday it had made a 113 million euros ($144.13 million)- or 7 euros per share - offer for the 54.15 percent of Vueling it does not already own. This represents a premium of about 28 pct to Vueling's closing price on Wednesday.

Vueling, Spain's second largest carrier by passenger numbers, has prospered despite the weak economic climate. It has benefited from the closure of loss-making airline Spaniar in January this year, the country's no. 4 operator at the time.

Budget airlines have coped more easily with the tough market conditions. In Scandinavia, Norwegian Air Shuttle, for example, is expanding into the long-haul market, contrasting with part-state-owned flag carrier SAS which is preparing cost cuts to secure its future.

Analysts believe IAG may want to use Vueling's low-cost base to help solve problems with Iberia, where plans to shed up to 7,000 jobs are expected to be announced on Friday.

"With its leading position in Barcelona, European growth strategy and low cost base, Vueling has much to offer IAG," Chief Executive Willie Walsh said.

"It has significantly increased capacity while remaining profitable, despite the Spanish economic slowdown, and already has extensive commercial arrangements with Iberia."

SLOWDOWN AND STRIKES

IAG, formed by the 2011 merger of the British and Spanish flag carriers, is currently trying to overhaul Iberia, which has performed badly compared with BA in the global economic slowdown and been plagued by strikes over pay and conditions.

Spanish unions have been expecting layoffs at Iberia for months due to Spain's recession and a shifting of Iberia's short to medium routes to low-cost carrier Iberia Express.

IAG has been in conflict with Spanish pilots union SEPLA over pay and conditions for the last year. The Spanish government appointed an arbitrator to help with the dispute but the situation has yet to be resolved.

The has resulted in uncertainty over IAG's ability to continue to grow Iberia Express.

IAG said Vueling would remain independent if a deal goes through. Analysts believe IAG will use Vueling to provide short-haul feeder traffic for Iberia's long-haul network and to take advantage of its lower cost-base.

"Vueling undoubtedly provides not just a market share position in Barcelona that Iberia is unable to address with its current high cost-base but also a potential template on which, if IAG needed to, it could move the Iberia short-haul operations," said RBC analyst Damian Brewer.

"That doesn't mean they will do that but it buys them options to do so if there are problems with pilots and other parts of Iberia in accepting the restructuring we're likely to see tomorrow."

IAG already holds 46 percent of Vueling's share capital, 23 percent is held by international institutional investors, 13 percent by Spanish investors and 18 percent by minorities.

Vueling shares in Madrid had risen 51 percent to 5.84 euros from end-2011 until trading in the stock was suspended on Wednesday. It shares were 24.9 percent up at 6.83 euros by 1610 GMT after the suspension was lifted, valuing the group at 207 million euros.

IAG's offer values it at 209.3 million euros, according to Thomson Reuters data.

Vueling posted a nine-month net profit of 50 million euros earlier this week and has net cash of 406.6 million euros.

IAG, which plans to fund the deal using "internal resources", said shareholders representing 90 percent of Vueling stock would have to approve the deal, which it said would not need regulatory approval by the European Commission.

IAG, due to publish third-quarter results on Friday, reported a first half loss of 253 million euros, weighed down by underperforming Iberia and rising fuel costs.

IAG shares in London closed 0.8 pct down at 168 pence.

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