Even after taking the JetBlue stake, LH has significant cash reserves on their hands, plus access to more money if need be.

The reason that they would like to buy Iberia (albeit at a reasonable price, and not at the premium that such an acquisition would currently involve) is, and always has been, the Latin American network. As chumbawumba posted upthread, there are relatively few *A connections from Europe to LatAm:

LH: MEX, CCS, GRU, EZE
LX: GRU, SCL
TP: CCS + 8 airports in Brazil

Iberia also has routes to MEX, CCS, GRU, GIG, SCL and EZE, which would create overlaps. But they also have routes to MVD, LIM, GYE, UIO, BOG, PTY, GUA, SJO, SDQ and HAV, none of which are are currently served non-stop from Europe on *A. It would go a long way towards strengthening *A's currently fairly weak position in LatAm.

With the start of new, tighter US immigration regulations, higher US visa application fees and a general perception that connecting in the US is more trouble than it's worth, these non-stops already command a significant price premium for the simple reason that they bypass the US. I expect this premium to increase in the future.

While BA could also benefit from this development, they seem to see their future in North America (as evidenced by them starting flights from Continental Europe to the US). Besides, BA has three major projects currently underway (consolidation of London operations, including the move to T5 at LHR and a rumoured closing of the LGW base; and the ex-Europe transatlantics; and the planned and partially annouced renewal of their both the shorthaul and longhaul fleet) which will all require a certain amount of capital expenditure (especially the fleet renewal). Taking on a fourth project - an integration of Iberia - may prove too much for BA at this point in time. BA was given every opportunity to buy Iberia - that they have not taken advantage shows that they're not interested in Iberia. At least not at the current asking price.

One other point for LH is that they have extensive fleet commonality with IB's mostly-Airbus fleet, which BA would not. While the short-haul fleet would align to a degree, BA does not have a single Airbus longhaul aircraft, while Iberia does not have a single Boeing longhaul aircraft. There is less synergy to a BA/IB deal than a LH/IB deal.

There are a lot of good reasons why LH should buy Iberia - but at the moment they feel that Iberia is simply over-valued.