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Commission tells airline proposed remedies still not enough to assuage competition worries over deal

British Airways owner IAG’s takeover of Spain’s Air Europa is close to unravelling after EU officials signalled that the airline group had still not done enough to ease concerns over the impact of the deal on competition.

Remedies offered by the companies — which included handing over around half of Air Europa’s slots to rivals — are still not enough to clear the proposed merger, commission officials told IAG and Air Europa at a meeting on Monday, according to people with direct knowledge of the matter.

The meeting took place just weeks before an August 20 deadline for the EU executive to decide on whether to block the deal. The chances of the takeover being blocked are now “very high”, the people added. It is rare for Brussels to block deals on competition concerns, with most transactions either getting cleared unconditionally or with remedies. Between 2014 and 2023 the European Commission blocked just nine mergers, according to White & Case, the law firm.

Still, with the Air Europa decision not yet finalised, the companies could still offer more last-minute remedies, fight any ruling to block the deal in court, or even walk away from the deal, the people added.

It is the second time that IAG, which owns five airlines including British Airways and Spanish flag carrier Iberia, has tried to buy Air Europa, after abandoning an earlier effort at the height of the pandemic. IAG agreed in February last year to buy the 80 per cent of Air Europa it does not already own for about €400mn.

A deal would give IAG new access to the growing south Atlantic market, and also help build Madrid airport into a major European hub.

But throughout the probe EU officials warned that the deal risked undermining competition and could lead to fewer choices for consumers and higher prices. The Financial Times first reported on the problems facing the deal in February.

Since then IAG officials have consistently said they still hoped the deal would pass, and offered remedies including offering about half of Air Europa’s landing slots to other airlines.

They have taken heart from the EU’s decision earlier this month to clear Lufthansa’s acquisition of 41 per cent of troubled Italian airline Ita, formerly Alitalia, subject to the disposal of some slots and routes to preserve competition.

Airline bosses believe the European industry needs to consolidate further in order to compete on the global market, as it faces cash-rich Gulf airlines to its east and highly profitable US carriers to its west; a region that saw its own burst of consolidation following the financial crisis.

IAG and the European Commission declined to comment.

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FTSE 100 consumer group’s Mead Johnson unit hit by US litigation over baby formula death

Reckitt is under pressure from top shareholders to revisit a sale of its nutrition business, following litigation and a series of other setbacks at the division that have sent the company’s share price to decade lows. 

The FTSE 100 consumer giant acquired the Mead Johnson infant formula business in 2017 for $17bn — its largest-ever acquisition — and it has been plagued by mishaps ever since. Meanwhile, the wider group, which makes Lysol detergent and Durex condoms, has underwhelmed investors as it struggles to build back sales volumes following a period of high inflation and suppressed consumer demand.

“Nutrition does not really have a strong strategic fit, and we’d be open to see that business find a new owner,” said Simon Jäger, a portfolio manager at Flossbach von Storch, which owns 4.2 per cent of the company and is its third-largest shareholder. 

The nutrition business makes up about 15 per cent of Reckitt’s revenues and is a fraction of the size of its larger hygiene and health divisions. The conglomerate is due to report its half-year results on Wednesday.

“Reckitt has identified the nutrition business as one that doesn’t fit into their future,” said Ellen Lee, a portfolio manager at Los Angeles-based asset manager Causeway Capital Management, which is a top-10 shareholder. “It’s a unique consumer product that is not really similar to the rest of the products they sell.”  

Analysts have estimated that the total liability from the infant formula litigation could be anywhere between £400mn and £8bn. 

Reckitt already sold Mead Johnson’s Chinese unit for $2.2bn to local private equity group Primavera in 2021, and later tried unsuccessfully to offload the rest of the baby formula business for between $7bn and $10bn. In 2020 Reckitt announced a $5bn writedown on the acquisition, blaming falling birth rates and local competition in China.  

In March a decision by a court in Illinois to award $60mn in damages to a mother whose child died after consuming a Mead Johnson formula wiped £5bn off the company’s market value. 

Barclays analyst Iain Simpson estimated Mead Johnson’s value at £5bn without the discount a buyer might demand to account for in the litigation risk. 

Reckitt has rejected the verdict and argued it has no scientific basis. “We are pursuing all options to have the verdict overturned and we believe the science is on our side,” the company said at the time. 

Last year the US food and drugs regulator sent Reckitt and two other baby formula manufacturers warnings over their manufacturing safety standards. Just last week the company announced its formula sales would suffer after a tornado damaged one of its warehouses in Indiana. 

Some investors have suggested that one option for Reckitt might be to ringfence Mead Johnson to protect the rest of the company until the litigation was concluded.

Lee at Causeway said a potential sale of nutrition represents a “trade off” for the company: selling the business now means “you give up some value but you get certainty. But maybe waiting 12-18 months is not that bad a thing.”

The company has also been targeted by activists. The Financial Times reported in May that Eminence Capital built a 0.5 per cent stake, and Bluebell Capital Partners has a smaller position.

Marco Taricco, co-founder of Bluebell, which has $120mn in assets under management, said the fund had urged Reckitt’s management to revisit plans to separate out the company’s hygiene and health divisions, a plan first introduced in 2018 by former chief executive Rakesh Kapoor.

“In such a way Reckitt would be in a better place to participate in the consumer health consolidation, as either a consolidator or target,” said Taricco.

Dealmaking in the fragmented consumer healthcare sector, which produces goods such as over-the-counter medicines, vitamins and skincare, has gathered pace since pharmaceutical companies GSK, Sanofi and Johnson & Johnson spun off their consumer divisions in order to streamline their business operations. 

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But the two top-10 shareholders dismissed Bluebell’s suggestion that the company should be broken up. 

“We’re not in the business of trying to break Reckitt apart,” said Jäger at Flossbach von Storch. “We’re interested in how the CEO can run the existing business better through making operational improvements, not on changing the structure of the company.” 

Lee at Causeway added: “We’re broadly not a fan of financial engineering. We don’t want the company to be so focused on short-term margin targets . . . to have sustainable top-line growth you need to invest into your brands.”

Reckitt said in a statement: “Last October CEO Kris Licht set out a strategy including three principles for portfolio value creation, in which every brand will need to earn its place in the Reckitt portfolio. We are committed to executing this strategy to maximise value for our shareholders.”