StockMarketWire.com - International Airlines Group and Deutsche Lufthansa have today reached a binding agreement for IAG to acquire British Midland. The cost is £172.5m in cash though the price is subject to significant reductions.

bmi consists of three distinct business units - bmi mainline, bmi regional and bmibaby.

IAG's Heathrow slot portfolio will increase by up to 56 additional daily slot pairs following the deal.

Lufthansa is to take on bmi's defined benefit pension scheme.

Lufthansa has the option to sell bmi regional and bmibaby before completion.

There will be a significant price reduction if Lufthansa does not opt to sell bmibaby before completion.

The deal is subject to competition clearance.

Earnings per share (EPS) will be accretive by 2014 at the latest.

A 2015 operating profit target of €1.5bn is to increase by more than €100m with consequent increase in EPS.

The deal underpins the goal of 12% return on capital employed by 2015.

Restructuring costs will be spread over three years and significantly lower in total than bmi's current annual losses.

Willie Walsh, IAG CEO, said: "Buying bmi's mainline business gives IAG a unique opportunity to grow at Heathrow, one of our key hub airports. Using the slot portfolio more efficiently provides the option to launch new longhaul routes to key trading nations while supporting our broad domestic and shorthaul network.

"This deal is good news for the UK as we will maintain a comprehensive domestic schedule including Belfast. Our plans to expand our longhaul network would guarantee growth by making Britain better able to compete on a global scale. It will also help maximise Heathrow's position as a world class hub airport.

"Customers will benefit from access to new destinations, more convenient schedules, enhanced frequent flyer benefits and greater investment than had been possible for loss-making bmi.

"Given the scale of bmi's losses, there is an urgent need to restructure the business. Unfortunately, this will mean some job losses but we will secure a significant number of high quality jobs here in the UK and create similar new jobs in the future. IAG's purchase of bmi will protect more British jobs than if the airline had been closed and had its Heathrow slots sold off. There will be restructuring costs spread over three years but these will be significantly lower in total than bmi's current annual losses.

"bmi regional and bmibaby are not part of our plans and Lufthansa has the option to sell them before completion".

IAG intends to finance the purchase from its own funds. £60m of the purchase price will be paid in four instalments to Lufthansa pre-completion. This amount will be secured by Heathrow slots.

It is hoped that the transaction will be completed during Q1 2012 subject to regulatory clearance from the European Commission and other bodies. There is a termination fee of £10m which is only payable by IAG if phase 1 EU regulatory approval is not achieved by March 31st, 2012 and either party elects to terminate the sales purchase agreement.

bmi mainline operates Airbus aircraft to destinations in the domestic UK market, Europe, CIS states, Middle East and Africa from London Heathrow. bmi regional operates an Embraer fleet and offers shorthaul flights within the UK and Europe from 7 regional airports. bmibaby operates Boeing aircraft and is a low-cost airline flying primarily out of East Midlands and Birmingham airports.

bmi reported gross assets of £284m as at December 31st, 2010 and a £153m loss before tax on revenues of £777m for the year 2010. Story provided by StockMarketWire.com