British Airways Owner IAG Won’t Bid for Norwegian Air

(Bloomberg) -- British Airways parent IAG SA abandoned an eight-month pursuit of Norwegian Air Shuttle ASA, leaving the indebted discount airline reeling as it faces a cash crunch during the slow winter season.

IAG “does not intend” to make a further bid and will be selling a 3.9 percent stake in due course, it said Thursday. Norwegian slumped as much as 26 percent, the most ever, while IAG reversed earlier declines to trade higher.

Bjorn Kjos, the Scandinavian carrier’s chief executive officer, previously rejected two offers from London-based IAG as undervaluing the business. The BA owner responded by saying it wouldn’t engage in a bidding war, though CEO Willie Walsh hinted that he was still interested at an investor day in November, fueling speculation about a sweetened approach.

IAG’s decision to walk away will spur concerns about Norwegian’s ability to weather a cash crunch after the Fornebu-based company announced last week that it would close some bases and routes as overcapacity squeezes fares across the industry. Walsh may have been put off by those cuts, as well as a profit warning at discount giant Ryanair Holdings Plc and concerns about flights and market developments as Britain prepares to quit the European Union.

Norwegian Air’s 250 million euros ($284 million) of bonds due in December fell 6 cents on the euro, to the lowest since March, before IAG bought its stake, according to data compiled by Bloomberg.

Kjos, a former fighter pilot, said in emailed comments Norwegian’s strategy will remain unchanged as it pursues plans to “continue building a sustainable business to the benefit of its customers, employees and shareholders.”

AB Bernstein analyst Daniel Roeska said the chances of IAG entering a further bid had been decreasing, especially with Norwegian likely to require a capital increase in the first half to avoid defaulting on its bonds. It’s possible that other carriers may be interested, with Deutsche Lufthansa AG having once expressed an interest, he wrote in a note.

Ole Martin Westgaard at DNB Markets said called developments “highly surprising” given IAG’s recent positive comments and the fact that it had planned to evaluate the situation until September. Norwegian will have negative book equity of 100 million kroner ($12 million) at the end of the first quarter and, in the absence of aircraft sales, will need an issue of at least 1.6 billion kroner to avoid breaching covenants, he said.

Norwegian Air must have a book equity value higher than 1.5 billion kroner and more than 500 million kroner of liquidity to comply with bond covenants, according to a company presentation.

Norwegian has undergone one of the fastest growth spurts in aviation history as it seeks to become a major low-cost player in Europe and extend the model to trans-Atlantic flights, aided by more fuel-efficient wide-body aircraft and newer versions of smaller jets for which the U.S. is now in range.

Concerns about the rise of Norwegian have compelled British Airways to embark on a cost-cutting spree and also prompted IAG to establish its own low-cost, long-haul airline, Level.

The U.K. company’s stock rose as much as 2 percent and was trading 0.9 percent higher as of 2:34 p.m. in London. Norwegian, which declined the most since listing in 2003, was priced 21 percent lower at 140.50 kroner.

IAG bought a 4.6 percent stake in the Nordic carrier last April to facilitate bid talks. The holding has decreased slightly after Norwegian issued more shares.

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