IAG International Airlines Group has converted its EUR100 million euro (USD100 million) loan to Globalia into a 20% stake in the Spanish tourism group’s Air Europa (UX, Palma de Mallorca) subsidiary, following through on a deal the two sides struck in March.

“IAG announces that it has exercised its option to exchange the group’s EUR100 million seven-year unsecured loan to Globalia for a 20% equity stake in Air Europa,” Nicholas Cadbury, the group’s chief financial officer, said in a brief filing to the London Stock Exchange.

Globalia confirmed the move in its own statement, saying that “the multinational International Airlines Group has become a shareholder of Air Europa with a 20% stake” and added: “The decision reinforces the project of Globalia, which will continue to be the majority shareholder of Air Europa.”

The acquisition makes IAG the carrier’s second-biggest shareholder after Globalia. It was carried out under the condition that IAG subsidiary Iberia (IB, Madrid Barajas) does not intervene in the management of Air Europa and that both companies continue to operate independently of each other. Iberia will not be able to have representation on the board of directors of its investee, sources familiar with the matter told the newspaper El País.

However, IAG and Iberia are ultimately negotiating for the authorisations to take over 100% of the company, in particular with the European Commission - and also Spain’s state-owned holding company (Sociedad Estatal de Participaciones Industriales - SEPI), which dominates the airline’s board after feeding it public aid of more than EUR600 million (USD600 million) over the last two years.

Iberia CEO Javier Sánchez-Prieto had said in June that the carrier would acquire 20% of Air Europa by the end of 2022 and “the next step is to try to get 100% of the company.” IAG CEO Luis Gallego said in April that the negotiations with the European and Spanish authorities could last another 18 months, meaning that a merger could happen by the end of 2023.

The conversion of the loan into equity has taken place with the approval of the Spanish government, Air Europa’s main creditor. This is despite the fact that if SEPI decides, due to non-payment, to convert its own loans to the airline into equity, as provided for in the bailout contracts, it would be entitled to 95% of the carrier’s capital - a clause that clashes with IAG’s plans unless the group is willing to assume some of loss-making Air Europa’s substantial debts.

In an interview with digital newspaper Okdiario, Globalia patriarch Juan José Hidalgo insisted he would not “sell off” Air Europa, as he has said on numerous occasions. In fact, he considers that the EUR100 million paid for the 20% stake shows the solidity of the company, and he is convinced he can continue alone despite the debts. While IAG says it is a step closer to a merger, Globalia, with the remaining 80%, believes this is not possible due to likely opposition from Brussels on several fronts.

“A merger of Iberia and Air Europa is not possible because the law prevents it. The law clearly tells you that a company that is not from the European Union cannot have more than 49% of the shareholding of a European airline. IAG, by not being European since Brexit, cannot have more than that percentage. It can reach up to 49% if we reach agreement, but no more,” Hidalgo said.

Regardless of the debate on whether IAG is Spanish or British, there are also European Union competition rules for IAG to negotiate, as the group found out in December.

“If they didn’t approve the merger when there was no air traffic due to the pandemic, now it will be impossible for them to do so,” Hidalgo added. “Brussels made it very clear that IAG could not control Air Europa because it wants us to be competitors, not a monopoly in Spain.”