Will Air Europa deal help IAG shares take off after recent fall?

The IAG share price failed to rally after news broke that it’s close to buying Air Europa, and on Monday there was no reverse to the five-day slump. But analysts are bullish, and Goldman Sachs has reiterated its buy rating.

  • IAG share price falls 11.5%
  • Air Europa acquisition will give IAG 84% of Spanish market
  • Analysts issue buy rating for IAG shares
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The International Consolidated Airlines Group (IAG) share price opened at 138p on 21 December, 11.5% down on Friday’s closing value. The decrease comes after a report by El Confidencial that IAG has agreed to buy Air Europa for €500 million (£453 million). The Spanish news website cited 'unnamed sources' in its 17 December story, but it’s since been picked up by Reuters.1

IAG close to Air Europa takeover

As reported, IAG’s payment for Air Europa will be deferred until 2026. However, perhaps more significantly, the offer is 50% lower than what was agreed in November 2019.2 IAG planned to buy Air Europa for €1 billion (£910 million) before the pandemic. However, a subsequent downturn for IAG shares and problems for the aviation industry at large prompted a renegotiation. Neither Air Europa, nor IAG’s Spanish unit, Iberia, have commented on the news.

Moreover, the Spanish government will have to waive its right to appoint two directors to Air Europa’s board for the deal to go through. Indeed, as part of a state aid package agreed last month, the government assumed certain controls over the airline. But, should the acquisition take place as reported, it will give IAG another low-cost European carrier. What’s more, it means IAG will control 84% of airline seats sold domestically in Spain.

IAG share price down but analysts are optimistic

The reduced price and potential increase in business hasn’t escaped the notice of analysts, even though the IAG share price remains bearish. From a one-month high of 166p on 23 November, it’s currently trading below 145p. Ongoing uncertainty over Brexit and fresh COVID-19 restrictions in the UK could be fuelling the bearish sentiment. However, the longer-term prospects for IAG shares may be more positive. Six analysts issued buy ratings last week.

Goldman Sachs reiterated its 195p IAG share price target, while Bank of America set its forecast at 190p. Berenberg Bank lowered its target from 260p to 180p but maintained its buy rating in light of the recent news. Of the major analysts, only Citigroup has issued a neutral rating. The investment bank has increased its IAG share price target from 146p to 150p, though. The current ratings suggest the acquisition of Air Europa could have positive implications for IAG shares. However, until certainty over Brexit and COVID-19 is established, the current bearish trend may continue.

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Footnotes:

1 Reuters
2 Forbes

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