Iberia's IPO Carries Lots of Baggage


O.K., your tech portfolio has taken a beating. So how about buying some shares in a struggling Spanish airline saddled with union problems?

It's hardly a tempting prospect, and investors, logically enough, are balking at the scheduled Apr. 3 initial public offering of Spain's Iberia Airlines. Over the weekend, Iberia fixed the final offering price at $1.07 per share, a far cry from the initially predicted range of $1.53 to $1.92. This price values the entire company at only $973 million dollars -- a 60% drop from 16 months ago when British Airways and American Airlines bought a combined 10% stake in the Spanish carrier.

Under normal circumstances, bankers would wheel this IPO off the runway. But the scene in Madrid is anything but normal. A contract between Iberia and BA is forcing the Spanish carrier to sell, even as the market thunders its disapproval. Anticipating a flurry of criticism, the Spanish government issued a statement explaining the low offering price vs. the higher sum paid by BA and American for their shares. The offering price is "completely justified" because the buy-in prices "are the product of a competition to take control of the company," whereas "the IPO price reflects the current state of the market and demand for the stock," the statement says.

LATIN GATEWAY. More problems could emerge if the long-postponed offering, which will lower the government's stake in the carrier to 5%, from 54%, fails to find enough buyers. Already, Iberia President Xabier de Irala says he won't stay at the company if the IPO fails. Worse, if the offering bombs, BA and American could decide to scout around for healthier European partners.

Iberia can ill afford to go it alone. The carrier has tried to position itself as Europe's gateway to Latin America, capitalizing on Spain's strong ties to other Spanish-speaking nations. But for this strategy to work, Iberia needs a European partner with slots in major air hubs north of Spain.

Losing BA would leave Iberia, which earned $210 million on revenues of $4 billion last year, vulnerable to takeover. Europe's airline industry, following the U.S. lead, is expected to consolidate in coming years to just two or three global players.

Why not just postpone the IPO? The Spanish government has been doing that for nearly a year, waiting for more favorable market conditions that never seem to come. With the market now tanking for real, Iberia's de Irala is running out of time. The 1999 contract he signed with BA and American guarantees full privatization before July. BA wants the IPO to go ahead. "BA extended the privatization clause several times and was willing to wait for Iberia to go public at an opportune time," a BA spokesperson says. "However, we [have] placed importance on their privatization because we want alliances with companies freed of state control." One big worry is that further postponement could trigger yet another strike from Iberia's pilots, who fear that full privatization will reduce their political clout and lead to layoffs.

SPENT IN ADVANCE. Little wonder, then, that institutional investors aren't jumping for Iberia shares. De Irala also faces a catch-22. He has to price the offering low enough to sell but must also reimburse the carrier's partners for any shortfall if the price is lower than when they made their $250 million investment in 1999. Given the modest IPO price, the payment to American and BA alone will now amount to about $148 million, a large chunk of the $473 million total the sale will net if it's successful. Other core stockholders also will have to be paid. That means less money for new planes, salary increases for pilots, and paying for early-retirement programs to cut staffing costs.

Of course, even a mediocre IPO could give Iberia a welcome bounce in the stock markets. But bounces in share price don't necessarily last. Over the longer term, Iberia looks more and more like takeover bait for stronger European airlines. By Philip Schmidt in Madrid


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