A formal bid for Spain's Iberia is likely to be made towards the end of next month as U.S. private equity firm TPG and British Airways look to seal one of Europe's biggest airline takeovers, sources familiar with the deal said on Thursday.
The consortium, which also includes two Spanish partners, finished due diligence checks on the company in early September and has invited banks to join the financing, the sources said.
Despite a global credit crunch jamming up leveraged buyout deals all over the world, financing for the acquisition of Iberia is progressing smoothly, the sources said, although it may have some impact on the price.
The consortium submitted an indicative offer of 3.60 euros ($5.10) per share in March, valuing the airline at around 3.4 billion euros, but concerns over global credit and the airline's initial reluctance to open its books has kept Iberia's stock below the approach price since July 26.
"The group has all the excuses to lower its offer," one of the sources said on Thursday, adding that recent turmoil in the credit markets increases the cost of debt.
The biggest risk in cutting the bid value would be a counter-offer from Air France-KLM, which has never ruled out being interested in the airline. A Spanish media report on Wednesday said it was preparing for a bid.
Iberia's shares were up 0.3% at 3.41 euros at 1445 GMT on Thursday, to value the company at 3.25 billion euros, soon after Iberia board-members left their monthly meeting.
Core shareholders have said they would not sell for below 3.60 euros.
British Airways chief executive Willie Walsh said on Thursday he was "pleased" at the way due diligence had gone after the group spent over a month poring over the books in Madrid.
Despite this, the consortium was denied access to detailed information on the profitability of key routes, because its rival, BA would see them.
But if they fail to get a clear picture, the group may hold off making an outright bid and instead ask for more information, one of the sources close to the deal said.
Alternatively the group could announce a bid price range and wait to fix the exact price until after it has seen further information on profitability.
"The price will be decided at the last minute. It depends not only on current profitability but also trends within the sector," the same source said.
The source added that the outlook for Madrid-Barcelona flights -- the world's busiest route -- was key as a high-speed rail link between the two starts late this year.
A rival bid could still emerge from Air France-KLM, which is talking to Spanish investment firms Torreal and Inversiones Hemisferio, controlled by business entrepreneurs Juan Abello and Jose Manuel Lara respectively, one source familiar with the situation said.
However, Air France's possible interest in ailing Italian airline Alitalia is delaying a decision on whether to launch a bid for Iberia, the source said.
"Their interest in Iberia isn't on paper yet," he said. Traders say renewed expectations of a TPG bid and the reported interest from Air France is behind a recent rally in Iberia's share price, which had fallen to as low as 291 euros on Aug. 10.
However, BNP Paribas analyst Geoff Van Klaveren said he still thought a counter offer from Paris was unlikely.
"Air France may take a close look at Iberia but in the end we think it is unlikely they will make a bid. There is just too much overlap on Latam routes. It already operates in those markets so it is not gaining anything."