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.

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

Young female business analyst looking at a graph chart while working from home
Investing Articles

Is Avon Protection the best stock to buy in the FTSE All-Share index right now?

Here’s a stock I’m holding for recovery and growth from the FTSE All-Share index. Can it be crowned as the…

Read more »

Investing Articles

Down 8.5% this month, is the Aviva share price too attractive to ignore?

It’s time to look into Aviva and the insurance sector while the share price is pulling back from year-to-date highs.

Read more »

Investing Articles

Here’s where I see Vodafone’s share price ending 2024

Valued at just twice its earnings, is the Vodafone share price a bargain or value trap? Our writer explores where…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

The Darktrace share price jumped 20% today. Here’s why!

After the Darktrace share price leapt by a fifth in early trading, our writer explains why -- and what it…

Read more »

Dividend Shares

850 shares in this dividend giant could make me £1.1k in passive income

Jon Smith flags up one dividend stock for passive income that has outperformed its sector over the course of the…

Read more »

Investing Articles

Unilever shares are flying! Time to buy at a 21% ‘discount’?

Unilever shares have been racing higher this week after a one-two punch of news from the company. Here’s whether I…

Read more »

artificial intelligence investing algorithms
Market Movers

The Microsoft share price surges after results. Is this the best AI stock to buy?

Jon Smith flags up the jump in the Microsoft share price after the latest results showed strong demand for AI…

Read more »

Google office headquarters
Investing Articles

A dividend announcement sends the Alphabet share price soaring. Here’s what investors need to know

As the Alphabet share price surges on the announcement of a dividend, Stephen Wright outlines what investors should really be…

Read more »