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IAG considers asking for €2.75 billion from shareholders – will they bite?

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IAG, the parent company of British Airways, was forced to issue a Stock Exchange announcement on Friday after Reuters reported that it was planning a €2.75 billion rights issue to prop up its shrinking balance sheet.

The appetite for this will be interesting.  The IAG share price fell by 5% on Friday, but it could arguably have been worse.  It will be interesting to see how keen shareholders are to put their hands in their pockets, when IAG could arguably follow Air France KLM and Lufthansa and demand a similar €10 billion of soft loans and non-repayable grants from the Spanish, and potentially UK, Governments.

What is a rights issue?

For readers unfamiliar with City terms, a ‘rights issue’ is when a company issues new shares – usually at a discount to the existing share price – and offers them for sale to its existing shareholders, pro-rata to their existing shareholding.

This bit is simple enough.  What makes it more complex is what happens if you do not take up your rights.

Because the new shares are being offered to you at a discount to the current share price, your ‘rights’ have a value in themselves.  If you refuse to invest new money, your ‘rights’ are sold on the open market and you are sent the money.  It is roughly the equivalent of being sent a money-off coupon for a product you don’t want to buy, and choosing to sell the coupon on eBay instead!

IAG looking to raise €2.75m from shareholders

IAG has already done a lot to raise cash

Desperate times call for desperate measures, of course.  We’ve already seen, purely from the British Airways side of the IAG table:

the sale of the best of the British Airways Galleries Lounge art collection

a £750 million advance payment from American Express in exchange for extending the current UK BA credit card contract 

the mortgaging of 48 aircraft, raising $750 million 

a loan of £300 million from the UK Government’s Coronavirus Corporate Finance Facility

and the drawing down of previously arranged debt facilities

This ignores the money raised by Iberia and by IAG centrally.

Of course, with the company burning through €200 million of cash per week, the actions above have only a temporary impact on the business.

Would a rights issue succeed?

The success of any rights issue will depend on the enthusiasm of Qatar Airways, IAG’s primary shareholder with 25%, to take part.  Based on IAG’s valuation of £3.95 billion on Friday night, shareholders will be asked to put up the equivalent of 60% of the current value of their existing shares.

IAG will also have to be careful to ensure that the shareholding by non-EU entities remains below 49.9%.  This could be tricky if Qatar Airways takes up its rights in full but other shareholders do not.

The real question is whether shareholders are happy to support IAG management in their plan to burn through shareholder funds rather than approach Government for a bailout.  €2.75 billion will be gone after 14 weeks at the current spending rate, after all, and what does the airline do then?  Return to shareholders for yet another €2.75 billion?

IAG rights issue

Here is the full Stock Exchange announcement:

Statement in relation to media speculation regarding equity raise

 International Airlines Group (IAG) notes recent media speculation regarding the possibility of IAG undertaking an equity raise. 

As detailed in its Q1 financial results announcement on 7 May, going into the crisis IAG had a strong balance sheet and liquidity with cash and undrawn facilities at 30 April of €10 billion. IAG has taken appropriate actions to strengthen its balance sheet and boost its liquidity position. This includes the announcement earlier today that IAG has extended its global commercial partnership with American Express and will receive a payment of approximately £750 million.

The Group is evaluating the merits of a rights issue of up to €2.75 billion that would further strengthen IAG’s balance sheet. No decision has been made as to whether or when to proceed with a rights issue.

A further announcement will be made as appropriate.

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Comments (68)

  • Paul says:

    Typo. Should be weeks not works. Very good article. I’m not inclined to take up my rights!

  • Farid hagmil says:

    “Pay people peanuts, you get monkeys” is the saying?
    Not suggesting BA retains staff that are monkeys BUT if you pay them low, the morale is low, the quality of service they offer is lower than before, and ultimately the client refuses to pay and the demise of the airline is on sight.

    I would not invest a penny on BA shares today!

  • RussellH says:

    I have never, ever, felt the slightest inclination to invest in any airline or aviation stock.
    I invest my money to improve my personal cashflow.
    This looks to me like investing to support IAG’s cashflow.

    • Ken says:

      Indeed, a whole industry littered with a history of failures and bankruptcy. A mature industry that has little scope for anything other than small incremental innovation.

      What’s changed for IAG ?

      No competitors have disappeared, in fact its back to the days of being propped up by governments. The Middle East 3 aren’t going anywhere.
      If things get worse you can guarantee that Lufthansa, the US airlines and KLM will have more taxpayer cash shovelled at them.

      The gains are retiring the 747 guzzlers, a bit lower employee cost base and a little less capacity with people delaying new planes.

      This year alone likely to cost a few years profits alone – and in real cash rather than valuation write downs.

      Wouldn’t touch IAG shares with a barge pole and can’t see any reason for them being in a strong position in 3 years time.

      May come a time when the share price becomes a huge leveraged punt, but that’s way less than £2 a share.

    • Genghis says:

      What’s the saying? Best way to become a millionaire is start as a billionaire and invest in an airline?

    • Chrisasaurus says:

      It isnt even disguised – they’re burning through 200m/ week so can everyone pls dip into their pockets… I’d pass too if I held shares…

  • James A says:

    Interesting. I am a shareholder with IAG so this directly affects me. I will mull it over but most likely I will elect to put money in and increase my stake, as I am a long term investor and I see the company eventually rebounding.

  • Chris says:

    When Alex Cruz met pilots at a meeting the other day, he said he didn’t know whether BA could survive. Not exactly a ringing endorsement of his own strategy and airline. Unfortunately, because people remain (or pretend to be) scared of COVID-19, a virus, whose effects have been blown out of all proportion, it doesn’t appear air travel numbers will sufficiently recover and quickly. Let British Airways die. They are a massive, bloated organisation and don’t deserve a Government bail out. If they go, there will always be airlines willing to fill the gap.

    • Farid hagmil says:

      I do agree..except that the virus danger is not blown out of proportion…

      • mradey says:

        ROFL

      • Chris says:

        Very amusing, Farid. The virus has killed 45,000 in the UK, of which just over 1,300 were either not very old or didn’t have at least one severe underlying health condition. For this, we have collapsed a large part of the economy causing massive economic suffering and job loses for many, especially among those worst off in society. In addition, the Government locked most people in their homes which has led to increased deaths amongst those people who had cancer, strokes and heart problems because they couldn’t or wouldn’t seek medical aid as the NHS was so focused on COVID-19. That is a totally disproportionate reaction to the virus, especially as in a bad flu season, not that far less die and nobody bats an eyelid.

        • Craig W says:

          I am not taking a view as to whether the virus has been blown out of proportion, as i hear the arguments on both sides. but you shouldn’t be saying “1300 deaths therefore it wasn’t worth the measures” that were taken, as that makes zero sense.

          surely you should be (somehow) thinking about what would have happened had the measures NOT been taken. Who knows what the numbers would look like had the measures not been taken, could have been 10x as bad if not more. So would your argument be the same if we were talking about 450,000 people dead of which 13,000 were young and healthy? As i said i am not taking a view, but your logic is broken

          • John says:

            Norway/Denmark and Sweden provide a case study of what might have happened. The first two had a full lockdown while Sweden didn’t. The result is all three countries’ economies are wrecked but Sweden has had far more deaths.

          • Chris says:

            Craig W, the reaction to COVID-19 is one of the most important issues of our time and you are unwilling or unable to take a position on the measures – that is, I must say, quite incredible.

            Anyway, that aside, interesting choice of words you have chosen saying I “shouldn’t” be saying or writing certain things. As to your point about what might have happened, then there were, as we know, many predictions, with the most well known being those of Imperial College. Fortunately, countries such as Sweden and Japan proved that you didn’t need to lock everyone in their homes to combat the virus. Swedish deaths per million is lower than the UK and Belgium (similar sized country with a very harsh “lockdown”). Given “lockdowns” were untried and untested methods, the question we should be asking is how did Governments decide to take such a course without any evidence they might work (and they don’t work as Sweden, Japan and various studies are now showing).

            The hundreds of thousands of deaths predicted by Imperial College were never going to happen. If they were, the Japanese and Swedes would have been slaughtered. The action our Government took was totally out of proportion to the threat faced, but, sadly, they panicked, and here is the resulting mess.

          • Pat the Postie says:

            Nobody can make statements about the data right now, come back in a year and we can argue the points.

          • Chris says:

            Nice try, Pat, and very amusing. The Government panicked and didn’t wait for more information before rushing to act on Imperial College’s report (which itself was guesswork and extrapolation). I, and others, are not going to wait a year to discuss the “data” while lives, health and the economy are ruined. There is plenty of data to be discussed and none of it vindicates the Government’s actions.

    • Opus says:

      Sure and then lose 42,000 jobs and have those airlines exploit you more than BA already does

      • Chris says:

        It depends what you mean by “exploit”. BA has to be more expensive because it has higher running costs and is not an especially streamlined business. Also, just because BA were to collapse, doesn’t mean all jobs would be lost – other airlines would no doubt buy parts of the business and some jobs would be saved. But, even if you are right, is it a good idea for the Government to spend billions on saving the jobs of those people? What makes them special compared to, for example, the millions who will lose their jobs in the hospitality industry when pubs and restaurants inevitably fold?

        • Opus says:

          Which other airlines would buy a part of the business?

          • Rob says:

            Realistically, the UK Government would underwrite a rescue of BA from the administrator, in the same way it has taken over all of the rail franchises. Irish and Spanish Governments would do the same.

            Lufthansa or Air France KLM will then turn up waving their €10bn bailouts and buy them for peanuts.

        • Opus says:

          Secondly by taking out a MASSIVE competitor like BA that already makes tickets more expensive which leads to how other airlines will exploit you. regardless of their costs they know you have much less options. imagine the cost of going to the far east with airlines like singapore, cathay, ANA etc. They’ll charge whatever they like because BA is out of the market and you have no choice but to pay it. even if you connect, prices too will be hiked up. BA is a MASSIVE player in the market, so i don’t know what personal benefit you gain from seeing them out of the market other than to prove a point

  • Rob says:

    IAGs share price is down almost 10% this morning on the back of the new Spanish travel rules. This will make the rights issue even harder to get away – it will need to be at a SUBSTANTIAL discount to the existing share price if investors are to be confident that the market price won’t drop under the rights issue price during the few weeks it takes to get the process done.

  • ADS says:

    The art sale seems to be a bit of PR gimmick – only about 8 items for sale.

    If you’re in central London before 11.30am tomorrow you can drop into Sothebys for a quick look – some of them are in slightly obscure parts of the building, so you may need to hunt around !

    https://www.sothebys.com/en/articles/art-from-the-british-airways-collection

  • Bazza says:

    On this occasion I wish we would be a bit more dodgey like the Germanys. Rather than always being the ones to play it straight.