Why I think the low share price could make IAG a takeover target

Rupert Hargreaves explains why he thinks the IAG share price is looking increasingly appealing from a takeover perspective.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

The IAG (LSE: IAG) share price has encountered significant turbulence over the past 24 months. But as the global economy starts to reopen, I think there is an increasing likelihood the group could become the prey of a larger target. 

This view is based on the analysis of industry insiders, who believe that, coming out of the pandemic, the airline industry will have to consolidate to survive. IAG’s market value also remains around 70% below its pre-pandemic level, which could entice potential buyers. 

Merger potential 

IAG, which owns British Airways among other brands, is one of the largest airline groups in the world. That puts it out of reach of most competitors.

However, deep-pocketed companies such as Emirates and Etihad, both of which are backed by the United Arab Emirates, could afford the price tag. Such a deal would give these corporations access to IAG’s valuable landing slots at Heathrow and other assets. 

Other airlines could also have the financial clout to drive a merger of equals. In the United States, aviation activity has recovered much faster than across Europe and the rest of the world.

This has helped Delta Airlines return to profitability. For the quarter ending September, net income totalled $1.2bn. The company’s market capitalisation at the time of writing is just under $26bn (£19bn). IAG’s market-cap is £8bn. 

I think these numbers illustrate that while the British Airways owner is one of the largest airline groups in the world, its size does not make it immune to a takeover. 

One of the biggest challenges airlines face is keeping costs under control. The industry is notorious for high costs and fare wars, which can hurt revenue growth and profit margins. One of the easiest ways to reduce costs is through economies of scale. This is the approach IAG has used over the past decade or so. By merging several airlines together, management has been able to slash operating costs and improve overall efficiency. 

The same logic could apply to a merger between IAG and a larger peer. The airlines would be able to strip out unnecessary costs and achieve more bargaining power with suppliers. 

IAG share price risks 

This is just speculation at this stage. There is no guarantee a buyer will emerge, nor have there been any rumours suggesting a deal is around the corner. And there are many reasons why buyers may want to avoid the business. It has a lot of debt and a significant pension scheme.

The British Airways pension scheme is one of the largest in the country, and IAG has to spend tens of millions every year to reduce its deficit. This alone could be enough to put off a potential buyer. 

Still, for the reasons outlined above, and considering the stock’s performance over the past two years, I think the chances of a potential buyout are growing. This is just one of the reasons why I would buy the stock for my portfolio today. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

This FTSE 100 passive income gem now has a forecast yield of a stunning 8.5%, so should I buy more?

This FTSE 100 dividend giant already has a very high yield, and is projected to go even higher in the…

Read more »

Young Caucasian girl showing and pointing up with fingers number three against yellow background
Investing Articles

3 key reasons why I think BP’s share price could soar following a 16% fall over the year…

BP’s share price has lost considerable ground over the course of the year, but I think there are three reasons…

Read more »

Businessman hand stacking money coins with virtual percentage icons
Investing Articles

Building a second income with FTSE 100 dividend shares: my simple 3-step plan

Mark Hartley outlines a straightforward three-step approach to building a second income portfolio with well-established FTSE 100 dividend shares.

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Experian: still one of the UK’s top shares as strong growth continues

Experian shares are up after the firm’s latest trading update. So should UK investors consider buying one of the FTSE…

Read more »

Close-up image depicting a woman in her 70s taking British bank notes from her colourful leather wallet.
Investing Articles

Is Lloyds Banking Group the ultimate FTSE 100 value stock?

When Harvey Jones bought shares in Lloyds a couple of years ago he thought it was the ultimate value stock…

Read more »

Senior Adult Black Female Tourist Admiring London
Investing Articles

See what £10k invested in ailing GSK shares is worth today…

No investor will be happy with their GSK shares as the FTSE 100 pharmaceutical giant has had a dismal decade.…

Read more »

A young black man makes the symbol of a peace sign with two fingers
Investing Articles

2 profitable penny stocks that are outpacing Rolls-Royce this year!

Intent on uncovering the best penny stocks in the UK, our writer has identified two gems that are beating the…

Read more »

Mature black woman at home texting on her cell phone while sitting on the couch
Investing Articles

£10,000 invested in Lloyds shares at the start of 2025 is now worth…

Lloyds shares have risen from 55p to 76p this year. This means that those who invested in the bank at…

Read more »