British Airways pulls out of bid for Iberia

British Airways and its private equity partner TPG have pulled the plug on the drawn-out bid for the Spanish airline Iberia after the UK airline turned down the opportunity to increase its stake in the rival airline.

BA's appetite for the deal was tested last week when Caja Madrid, a Spanish bank that opposes BA's plans, revealed that it had agreed to buy out two investors in the Spanish airline, a move that would give it a stake of more than 23 per cent and the power to block the takeover. However, BA, which already owns a 10 per cent stake in Iberia, had right of first refusal to increase its holding by buying out BBVA – which owns 7 per cent of the Spanish airline – and Logista, the logistics arm of the cigarette group Altadis that holds more than 6 per cent.

The move tested the resolve of BA, which alongside TPG and a host of Spanish investors, has been working on a €3.4bn (£2.4bn) take-over for Iberia for more than six months. Caja Madrid has categorically said it would not sell its Iberia stake and instead would examine a rival bid being put together by a Spanish consortium led by Gala Capital. The bank has expressed concerns that allowing Spain's national carrier to fall into foreign hands could reduce the importance of Madrid's Barajas airport as an international hub.

Matching Caja Madrid's plans would have cost BA €238m, and the move would have been contrary to earlier pledges by Willie Walsh, chief executive of BA, not to invest more capital in Iberia. BA had until midnight yesterday to decide whether it would exercise its pre-emptive rights over the BBVA stake.

Keith Williams, the chief financial officer of the UK airline, said: "British Airways' position as Iberia's key industrial partner remains important and is not dependent on an increase in shareholding. We will enter into discussions with Caja Madrid in order to maximise the value of our relationship with Iberia."

Analysts were not surprised that the protracted takeover of Spain's fourth-largest airline had been called off. TPG initially made the bid in late March before aligning itself with BA but the credit crisis put the skids on an early completion of the deal. Meanwhile, Air France-KLM, the Franco-Dutch carrier, is working on a bid pitched higher than the TPG-BA proposal but is unlikely to make any move until after the Spanish elections in March.

A deal to take over Iberia would have strengthened BA's position against its European rivals Air France-KLM and Lufthansa but Mr Walsh has argued that the takeover is not transformational and that BA's focus is improving profitability at its Heathrow operations.