(Bloomberg) -- IAG SA bought a stake in Norwegian Air Shuttle ASA and said it’s considering making a full offer for the discount competitor, signaling a new round of dealmaking in a rapidly consolidating European airline market.
Shares of Norwegian Air soared as much as a record 47 percent on Thursday. A potential acquisition could value the company, which has a market value of more than $1 billion, at about $3 billion including debt, people with knowledge of the matter said, asking not to be identified because the deliberations are confidential.
IAG will use the 4.61 percent stake to initiate discussions with Norwegian, it said in a statement after Bloomberg News first reported it may make an offer. The ownership stake makes it harder for Norwegian to brush off the approach while acting as a deterrent to rival bidders.
“It’s an indication of intent in terms of their seriousness,” Goodbody Stockbrokers analyst Mark Simpson said of IAG’s move. “It gives them the platform to enter discussions with clear intentions.”
Taking out Norwegian would eliminate a fierce competitor that’s shaken up the airline industry with low-cost long-haul flights, and is now imposing on IAG’s turf in both London and Latin America. It would also give the British Airways owner access to a young fleet with fuel-efficient jets that have opened the way for new routes. IAG, which has its own low-cost Level and Aer Lingus brands, pounced after monitoring Norwegian Air for the past several months, according to people familiar with the matter, as the Nordic carrier bled cash and struggled with its debt load.
“IAG’s interest in the company confirms the sustainability and potential of our business model and global growth,” Norwegian said in a statement.
Shares of Norwegian Air soared 45 percent at about 4 p.m. in Oslo, boosting its market value to about 10.5 billion kroner ($1.35 billion) -- aided by a squeeze on short sellers, who have bet heavily against the airline. Norwegian had previously jumped about 10 percent this week, erasing some of last year’s 39 percent rout. IAG, whose largest shareholder is Qatar Airways Ltd., dropped about 1 percent for a market value of about 12.5 billion pounds ($17.7 billion).
Other airlines in the region rose broadly in anticipation that a large discount rival would be eliminated. SAS AB, the Nordic region’s biggest mainline carrier, gained as much as 11 percent. EasyJet and Ryanair advanced 2.9 percent and 1.8 percent, respectively.
Any deal would accelerate a rapidly consolidating European airline market. EasyJet PlC and Deutsche Lufthansa AG have already split up most of the assets of failed carrier Air Berlin. Alitalia SpA has attracted interest from three groups, including EasyJet and Lufthansa, as part of a government-led rescue effort. Ryanair, Europe’s biggest discounter, is taking over Austria’s Laudamotion, formerly Niki. Meanwhile, SAS plans to standardize its fleet to cut costs as it positions itself for an industry shakeup.
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IAG has been scouting for potential acquisitions in Europe and while the U.K. firm has set its sights on Norwegian Air, it previously looked at targets including Spanish airline Air Europa Lineas Aereas SAU, the people said. A spokesman for Air Europa, owned by conglomerate Globalia Corporacion Empresarial SA, declined to comment.
Norwegian Air’s aggressive foray into low-cost intercontinental flights has disrupted the market and forced bigger industry players like British Airways and Air France to take measures to woo travelers. The company relies on a modern fleet of Boeing Co. 787 Dreamliners to help keep fuel and maintenance costs down, along with 737Max and Airbus SE A320neos that can go farther than past generations of narrowbody jets, opening up new long-distance routes. But Norwegian Air’s finances have been stretched, prompting the company to take steps to raise or preserve cash -- including selling some of its brand-new planes.
“Everybody in Europe wanted to buy us,” Bjorn Kjos, Norwegian Air’s 71-year-old CEO who controls about a 27 percent stake, said in an interview this month. But he said he wouldn’t consider selling the business until the aircraft investments start paying out, he said. “If you decide to sell, that is when you take in other investors, but that has not been on our agenda at all.”
British Airways has been restructuring its base at London Gatwick Airport, where Norwegian has focused a large part of its long-haul operations. Norwegian is also adding routes from Spain to Latin America, where IAG’s Iberia and Vueling brands operate.
IAG said in the statement that no discussions have taken place to date and “that it has taken no decision to make an offer at this time and that there is no certainty that any such decision will be made.”
Short of a full-scale acquisition, IAG could consider a partnership with Norwegian Air, combining it with Level, Bernstein analyst Daniel Roeska said. IAG could also feed Norwegian’s long-haul operations in London and Ireland, or take over some of its orders for long-haul aircraft, the analyst said.
“The products should not cannibalize,” Roeska said. “We see this move as a good strategic development for IAG,” he said. “They gain exposure to Norwegian with potential but no commitment for a more meaningful relationship.’’
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