British Airways Plc and Iberia Lineas Aereas de Espana SA’s proposed merger may push the combined company to bid for low-cost carrier Vueling Airlines SA, according to Spain’s takeover rules.

British Airways is seeking a stake exceeding 53 percent in the merged carrier. A combination leading to a change in control at Iberia may trigger a provision of Spain’s takeover law, known as Article 7, forcing the airline either to bid for all of Vueling or cut its holding, a regulatory filing by Iberia showed. Iberia owns about 46 percent of Vueling.

“If British Airways is the dominant partner in the merger, the case is clear,” said Angel Fernandez-Albor, a professor of commercial law and a lawyer at Madrid-based firm Cremades & Calvo-Sotelo. “In such an event, it’s obvious that Article 7 must be applied.”

Vueling has more than tripled this year to 11.24 euros as of 10:45 a.m. in Madrid trading. British Airways and Iberia, Europe’s third- and fourth-largest airlines by traffic, have been in talks on a merger since July 2008. British Airways Chief Executive Officer Willie Walsh said in a Sept. 29 interview that talks with Iberia have been “progressing in recent weeks.”

A transaction has been delayed by questions over the valuation of each carrier’s stake in the combination and the U.K. company’s pension deficit.

Caja Madrid

A spokesman for Iberia declined to comment. A Vueling spokesman also declined to comment. Richard Goodfellow, a British Airways spokesman said that talks on the merger with Iberia continue and declined to comment on questions regarding Vueling.

Vueling has a market capitalization of 165 million euros $240 million. The value doesn’t yet reflect new shares issued as part of the carrier’s merger with Clickair SA. The number of Vueling shares will double and the new shares will start trading pending approval from Spain’s market regulator.

Vueling’s second-largest shareholder after Iberia is Inversiones Hemisferio SL, a holding company of Spain’s Lara family that owns 14.3 percent. An official representing the family declined to comment.

Iberia’s largest shareholder is Spanish bank Caja Madrid, which owns almost 23 percent, followed by British Airways with 13 percent.

Iberia’s stake in Vueling stems from a merger of the low- cost airline with Iberia’s Clickair unit earlier this year. Iberia made the filing with the Comision Nacional del Mercado de Valores stock-market regulator in June to obtain an exemption to rules that would have forced the carrier to bid for all of Vueling because the holding exceeded 30 percent.

Article 7

A merger leaving British Airways as the larger partner may subject the Vueling stake to Article 7, Iberia said in the June filing. The provision gives a newly merged company that owns 30 percent or more of another publicly traded company three months to decide whether to seek a full takeover or reduce the holding, according to the Boletin Oficial de Estado edition of July 28, 2007.

“Based on the legislation, a bid could take place,” said Francisco Salvador, head of institutional sales for continental Europe at broker Iberian Equities AV in Madrid. “Should it occur, it will probably be a stock deal.”

The regulator will apply the legislation once the transaction has taken place and cannot comment or speculate on individual cases, an official at the commission said in a telephone interview.

Pension Shortfall

British Airways CEO Walsh has declined to specify a target merger ratio beyond saying at the annual shareholders meeting press briefing in July that a 53 percent-to-47 percent split in favor of the U.K. carrier was unacceptable to investors. The U.K. carrier will get an update on its pension shortfall in the next four to six weeks, Walsh said in the Sept. 29 interview.

Imperial Tobacco Group Plc raised its stake last year in Compania de Distribucion Integral Logista SA, Spain’s largest cigarette distributor, to about 97 percent from 59 percent after the U.K. company bought Logista’s parent, Altadis SA. Imperial Tobacco CEO Gareth Davis said at the time that his company chose to acquire Logista because finding a private- equity buyer was too difficult within the three-month deadline.

via British Airways-Iberia Merger May Trigger Vueling Takeover Bid – Bloomberg.com.