IAG mulls takeover of Norwegian?
 

Interesting times....

CP

Connections close to the source indicated that much of the interest was indeed strategic.

Problematic as we understand it is the structure of debt covenants and indeed the a bit of dis economy.

Having said that, always a sure sign the business cycle is long when Mergers are driving growth :E

Beeb:-

British Airways owner International Airlines Group (IAG) has confirmed that it is exploring a potential acquisition of low-cost carrier Norwegian Air Shuttle.
Shares in Norwegian jumped by as much as 26% on news of a possible tie-up before trading was suspended on the Oslo Stock Exchange.
According to reports, IAG wants to boost its market share amid increasing competition from low-cost carriers.

Norwegian declined to comment.

IAG said it had bought a minority stake in the airline with a view to opening talks about a deal.

"The minority investment is intended to establish a position from which to initiate discussions with Norwegian, including the possibility of a full offer for Norwegian," IAG said.
However, it said no discussions have taken place and it has not decided whether to make an offer.

If it isn't already, I reckon that in the not too distant future BA's decision to sell GO to one of it's potentially biggest competitors will be right up there amongst academics researching the biggest corporate mistakes / failures of the past 100 years.

Actually it isn't necessarily.
Perhaps the biggest mistake airline management is make searching for lower labour unit cost at the expense of everything else.

Permit the divergence, however if one looks at Qantas and Jetstar two airlines and one company the problem can be deciphered despite the accounting opaqueness.

Jetstar now has more aircraft than the parent. It flies 48% of the ASK that Qantas flies, yet generates only 22% of the revenue. This is suggestive of elasticity.

Thus had Go and BA existed side by side, the low fruit was the labour unit cost it may have jumped the containment too as a panacea for all ills!
Jetstar, was designed to lower labour unit cost and create tension between cost centres. A low fare airline struggles for yield. A Low Fare Airline is a volume business, the Achilles heel of the model is its demand elasticity. They struggle to generate consistent operating margins is evidenced by their rate of failure. The 'value proposition' full service airlines used to offer gave them a degree of demand in-elasticity, most certainly more evident in J class.

Qantas do not report Jetstar in two Operating segments (Domestic and International) yet they do Qantas. They choose not to. It is highly probable that Jetstar Internationally is a substantial loss maker.



BA saved itself from diluting its yield, but as they continue to hack into BA's value proposition (for they all went through the same MBA courses) they look for lower labour unit cost instead of yield maintenance.

Permit me to borrow from Herb Kelleher (South West) and I paraphrase badly;

"You can have the lowest cost airline or the largest revenue airline and still go broke, what matters is the gap between the two"

As I’ve said on another thread (on airlines airports and routes) IAG could very well be on a fishing expedition here to see exactly how bad the financials are. In any takeover bid they’d be allowed full access to the books...

Correct Rex, got to own enough to get to do diligence..

As our sources suggested, they are pretty worried about the debt covenants.

Even if you get access to the books there are plenty of stories from the business world where pre M&A due diligence failed to uncover catastrophic problems .

As in the QANTAS . Jetstar case the books tell you one thing but reality is another and in a situation like Norwegian arcane financial engineering might make it very very difficult to get a true picture of the real state of play.
Buyer beware

Air Berlin was a star, once.

Takeover of Norwegian
 

Would be a great shame. Just had a very nice Bangkok-Oslo flight in
Premium. Hesitate to think what effect an IAG takeover would have.

Attempt to rein in an upstart competitor, esp on those lucrative trans-Atlantic routes were Norwegian have made such inroads? Also, if IAG don't decide to move to a full bid then further questions will be asked about Norwegian's financial health. Win-win for IAG...

IAG only get a look at the books if Norwegian decide to co-operate . In a full on hostile takeover they don't have to hand over any info and even then:-

"The offeror will invariably conduct a due diligence exercise in relation to the target company before announcing an offer. The extent of the due diligence exercise in the case of a hostile offer will be limited
to reviewing publicly available information, such as the results of searches of public registers and financial analysts’ reports. In the case of a recommended offer, the due diligence exercise may be much more
extensive, but the target company will often seek to limit its extent, either because it does not wish the offeror, who may be a competitor, to obtain confidential information from it, or because it would not
wish the information to be made available to an alternative offeror (see paragraph 3.1 below in relation to Rule 21.3 of the City Code) or because the target company wants to ensure that details of a potential
bid are not leaked to the public.

For all these reasons, as a matter of practice, due diligence in public offers is often limited in comparison with private sales. The target company will, prior to handing over any information, ordinarily insist upon the potential offeror entering into a confidentiality agreement and it would also often seek to include in the confidentiality agreement “standstill” provisions, that is to say provisions restricting for a specified period the ability of the offeror to acquire target company shares without the consent of the board of the target company. There are difficult questions of law as to the "enforceability of standstill arrangement

Norwegians' model has yet to show one thing. Profits.

I wonder who approached who. Did IAG initiate things, because they are interested in the acquisition, and consolidation of some operations, especially at Gatwick, or did Norwegian ask to be looked at, maybe rather quickly ...

Is this shades of both B.Cal and Dan-Air, each bought for £1 (plus all the debts).

Show me one airline that has with growth that is as rapid as NAS. Their EBITA is keeping pace with their growth, they just need to increase efficiency or utility slightly and will be in profit.

Don’t you just love reading the arm chair economists who have an opinion on everything but knowledge of nothing on all matters to do with growing a business. I know I do.

IAG - Norwegian specifically stated they didn't know. I guess IAG went over 3% and so had to notify them....

A third option is that the banks who have funded Norwegian have initiated this with IAG, if they felt what they had lent was at risk.

That could be done without buying any shares at all.........