British Airways has been holding talks with private equity firms about a potential takeover of Spanish-flagged carrier Iberia. The deal is believed to be worth US$5 billion including debt, reports The Independent newspaper of London.

The report said that one of the three private equity houses that BA has been in negotiations with includes Apaz Partners. Another potential partner in the buyout is reported to be Spain's Gestair.

The UK's largest carrier already has a 10 per cent stake in Iberia, but it is not expected to buyout the Spanish airline on its own, although it has first refusal on the purchase of another 32 per cent share bloc in the airline. However, BA has not made a final decision on how to use its equity stake in Iberia, and has not ruled out a full disposal.

"Any consortium bid would not involve further capital investment by British Airways," BA said. "As well as a private equity partner this consortium is likely to include one or more Spanish partners."

In an announcement earlier this week to the London Stock Exchange, BA said it was considering how to use its shareholding in Iberia after US private equity house Texas Pacific Group (TPG) launched a bid of $3.60 per share for the carrier last month.

Iberia would be able to retain its foreign landing rights provided a Spanish airline participates in any takeover deal. At present non-European investors can hold up to a 49 per cent stake in an European Union airline, but once the "open skies" accord between Washington and Brussels comes into come next March, this will be reduced to 25 per cent.

The report noted that TPG is also a member of a Macquarie Bank-led consortium which is seeking to takeover Qantas Airways for $9 billion.