Texas Pacific Group Grabs Iberia's Tailfin

If Kohlberg Kravis Roberts is cornering the market in retail bids, with its dual pursuit of Sainsbury's and Alliance Boots, fellow US private equity house TPG has developed a taste for airlines. And like all serious plane-spotters, the former Texas Pacific Group seems determined to tick off every tailfin in sight.

Not content with engineering a landmark buyout of Qantas, the Australia flag carrier, TPG has bid E3.41bn (£2.3bn, $4.6bn) for Iberia, the Spanish national airline. At the same time, the US group is eyeing Alitalia, which this week attracted a surprise bid from Aeroflot.

The firm has proved its aviation credentials with turnarounds at airlines including Continental and America West. With investors fighting to throw cash at private equity firms, TPG has gone into a plane-spotting frenzy.

The Qantas deal has hit turbulence, with a minority stakeholder holding out for an increase in the A$11bn (£4.5bn) offer price. But just getting to the stage where Australia would consider allowing foreigners to buy a slice of its national treasure was an achievement in itself. TPG, part of a consortium led by Macquarie Bank, engineered enough of a local flavour to calm local concerns.

In bidding for Iberia, TPG faces similar issues of national pride. Under the bilateral air treaty between Spain and Latin America, Iberia would forfeit access to key South American cities if control of the airline passed to a foreigner.

Iberia is the leading airline flying between Europe and Latin America, with 19% of the market (Air France has 17%) and its long-haul routes are the prime attraction to a buyer. In common with other European national carriers, Iberia's domestic and European routes have been hit by competition from low-cost airlines.

As a non-airline, TPG would be better placed to team up with Spanish partners to take control of Iberia while defusing a row over foreign ownership. But while the strategy has worked in Australia - at least in getting the deal to the final stage - Iberia is more complex still. The fly in the ointment, or potential saviour, is British Airways.

BA owns a 10% stake in Iberia and has a say over a further 30% of the shares, thanks to an arrangement with minority shareholders including bankers BBVA, tobacco group Altadis, and retailers El Corte Ingles. The shareholders must offer their shares to each other before selling to an outsider.

Even if BA speaks for a potential 40% blocking stake in Iberia, its intentions remain unclear. It has appointed UBS, the Swiss investment bank, to explore options ranging from a sale of its 10% Iberia stake (currently worth E377m) to a merger with the airline.

Analysts are sceptical that BA would bid for Iberia. BA has pledged to spend £800m on new aircraft orders and is grappling with a £2.1bn pension fund deficit. A move on Iberia would require an unpopular rights issue. It is more likely that BA will look to closer ties with Iberia, possibly working with TPG.

It is all part of the jockeying for position to follow the new Open Skies treaty between Europe and the US, which will throw Heathrow open to all-comers from March 2008.

British Airways controls 41.4% of takeoff and landing slots at Heathrow; it needs to maintain its grip on the airport while covering its bases elsewhere in Europe. Iberia could be part of the strategy.

In further horse-trading, BA has been tipped as a bidder for BMI, the former British Midland, although a bid is unlikely as long as Sir Michael Bishop, BMI's founder-chairman, holds a controlling stake.

Spain aside, TPG is considering its position in Italy, where Aeroflot, the Russian flag-

carrier, has unexpectedly tabled a £900m bid for Alitalia, the loss-making national airline. TPG has been contemplating a bid as part of a consortium including Mediobanca, the Italian bank.

Aeroflot has teamed up with UniCredit, Italy's largest bank, to bid for most of the 49.9% stake in Alitalia held by the Italian finance ministry. It would be Aeroflot's first large investment outside the former Soviet Union, and fits the trend of Russian state-owned businesses making strategic investments in Europe.

Alitalia lost more than E400m last year, of which almost E130m came in the last quarter. It has posted a loss in six of the last seven years.

TPG's airline credentials are not in doubt. The group is a key shareholder in Ryanair, the Irish carrier where David Bonderman, TPG's co-founder, is chairman, and helped turn round America West, a regional US airline that has since merged with US Airways.

In 1993, TPG bailed out Continental, the loss-making US carrier, and initiated a recovery strategy under Gordon Bethune, a feisty former US Navy pilot who later described the results in a book, From Worst To First.

Bonderman, who became chairman of Continental, did not shy away from tough action of his own. Once, upon being served a bad meal on a Continental flight, he kept the meal and posted it to the airline's headquarters.

Poor airline catering came back to haunt Bonderman. TPG owned Gate Gourmet at the time of the hugely damaging Heathrow industrial action in 2005 (it has since sold its shares). But it was a rare slip from a man who understands the aviation industry better than most. As Europe's flag-carriers come up for grabs, TPG is unlikely to miss out on the action.



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