International Consolidated Airlines Group S.A. Thursday beat rival Virgin Atlantic in the takeover battle for Deutsche Lufthansa AG's loss-making airline British Midland International, or bmi, helping to secure the group's future growth at London's congested Heathrow airport.
IAG, which owns British Airways and Iberia, said it had agreed to buy bmi for £172.5 million ($271 million) in cash, although it may end up paying less as Lufthansa has agreed to pay compensation if it can't sell bmi's small regional and bmibaby subsidiaries before completion.
Bmi, which reported an operating loss of €154 million for the first nine months of the year, has about 10% of the take-off and landing slots at Heathrow, the world's busiest international passenger airport, making it an attractive asset. If the deal goes through, the proportion of slots IAG owns at the airport will rise to about 53%.
"Buying bmi's mainline business gives IAG a unique opportunity to grow at Heathrow, one of our key hub airports," said IAG Chief Executive Willie Walsh.
He said that the ability to use the slots more efficiently "provides the option to launch new long-haul routes to key trading nations while supporting our broad domestic and short-haul network."
IAG said it will also maintain a comprehensive domestic schedule, including the Belfast, Northern Ireland route.
The deal will come as a blow to Virgin Atlantic. According to a report in the Times newspaper earlier this month, Virgin had made a non-binding offer of about £50 million for bmi, seen as vital for Virgin as a feed airline for its transatlantic routes.
Through a code-sharing agreement, bmi provides around 20% to 30% of Virgin traffic. There is no guarantee that BA, the dominant player on transatlantic routes from Heathrow, will honor that pact if IAG's deal for bmi goes through.
Virgin couldn't immediately be reached for comment.
The deal, subject to approval by the European Commission, is expected to be completed by the first quarter of 2012. IAG will pay £60 million to Lufthansa in four installments pre-completion, with an agreement that if the deal breaks down, the sum will be repaid in the form of slots. There is also a £10 million termination fee, payable if either side walks away or if IAG fails to get initial regulatory approval by March 31.
The sale will also come as some relief to Lufthansa, which has been looking to rid itself of the loss-making airline for a number of years. It was forced to buy bmi for £223 million when the U.K. airline's founder, Michael Bishop, exercised an option to sell his majority stake to the German airline in 2009. Lufthansa has made efforts to restructure bmi by focusing on routes serving the oil industry in the Middle East and Russia.
However, political turmoil in the Middle East this year foiled the airline's plans to return bmi to profit.
Lufthansa Chief Executive and Chairman Christoph Franz said shareholders will benefit from a "sharpened corporate profile and a stronger financial position of the group."
IAG, meanwhile, said it will be forced to cut jobs due to bmi's losses, but didn't say how many. Lufthansa has agreed to take on bmi's defined benefit pension scheme.
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