British Airways-Iberia merger talks on the rocks

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By Ben Harding and John Bowker

MADRID/LONDON (Reuters) - British Airways (BAY.L) and Spanish partner Iberia (IBLA.MC) may walk away from merger talks, or seriously delay a deal, because of ever-widening disagreements over what the two carriers are worth.

British Airways had expected to call the shots when the long-term partners announced merger plans last July, but since then its tumbling share price, a ballooning pension deficit and a profit warning this week have put Iberia in the driving seat.

BA stock has lost nearly 45 percent since the pair unveiled the exclusive merger talks, while Iberia has risen about 11 percent. Add in the pound's pummeling against the euro and Iberia has emerged the larger in terms of market capitalization -- 1.75 billion euros ($2.32 billion) versus BA's 1.57 billion pounds ($2.24 billion).

That is a radical turnaround for the Heathrow-based airline, which expected to take around 65 percent of the new airline.

BA CEO Willie Walsh told newspapers last week that BA shareholders would not accept the current market cap-based split and Exane BNP Paribas analyst Nick van den Brul said even a 50-50 division is likely to be a deal-breaker for BA, which outscores Iberia on other measures.

"At the moment it doesn't look very likely to go ahead. A one-to-one share ratio would be too much for BA shareholders to stomach," said van den Brul, who does not expect any deal for another year until BA's share price rebounds.

According to BNP Paribas estimates, BA has an enterprise value of 6.1 billion pounds versus Iberia's 3.6 billion, mainly thanks to owning a greater proportion of its 245 aircraft than Iberia does of its 198-strong fleet.

Analysts are also forecasting BA will rake in 9 billion pounds (9.64 billion euros) of revenue in the year to March according to ThomsonReuters estimates, versus 5.45 billion euros estimated by Iberia at an analyst presentation on Wednesday.

PENSIONS TIMEBOMB

Just as BA shareholders are likely to be backing away from a merger while its shares are in the doldrums, so Iberia is moving more cautiously because of BA's pensions liabilities.

Iberia Chairman Fernando Conte confirmed to analysts on Wednesday that talks were focused on valuations -- including the impact of BA's pension gap -- but he also struck a positive note by stressing "substantial revenue and cost synergies."

The Madrid-based carrier has hired independent pension experts Mercer to study the health of BA's retiree scheme -- a report to be delivered within weeks -- ahead of a full actuarial valuation from BA pension trustees due out in late summer.

Both are almost guaranteed to calculate a far bigger deficit than the 1.5 billion pound hole in its main scheme identified by trustees as of March 31 last year.

"Not only will pension assets have fallen since March as markets have dropped, but the higher corporate bond yields in recent months mean that many companies pension liabilities appear smaller in their accounts than might be the case in reality," said Jerome Melcer, a partner at pensions consultants Lane Clark & Peacock.