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UAL, Continental to form largest airline

03/05/10

By Deepa Seetharaman and Kyle Peterson

NEW YORK/CHICAGO (Reuters) - United Airlines parent UAL Corp will buy Continental Airlines Inc for $3.17 billion to form the world's largest carrier, moving to better withstand the hazards that have battered airlines in recent years.

The merger, if approved by regulators, would create a sprawling global airline designed to lure more well-heeled business travelers.

The combined carrier, with over $29 billion in annual revenues, would carry the name United Airlines and be based in Chicago. The deal, announced by the companies on Monday, is expected to produce $1 billion to $1.2 billion in annual revenue and cost benefits by 2013.

"It's really a classic end-to-end kind of merger where both companies benefit from the transaction," said Michael Derchin, principal at CRT Capital Group.

The deal is the first major U.S. airline merger since Delta Air Lines' 2008 purchase of Northwest, and caps months of speculation that more industry consolidation was ahead.

However, the merger, while transformative for the two airlines involved, promises little if any capacity cuts that might bolster ticket prices for the industry, which struggles with overcapacity, low-fare competition and volatile fuel prices.

And experts say the deal probably will not inspire similar mergers among the remaining hub-and-spoke carriers.

United and Continental said their merger would expand service with minimal domestic and no international route overlap. The combined company will have 10 hubs, with Houston as its largest, and a workforce of nearly 90,000.

Shares of UAL were down 0.6 percent at $21.47 on Nasdaq. Continental shares were off 1.3 percent at $22.06 on the New York Stock Exchange.

ALL-STOCK DEAL

According to the terms of the deal, Continental shareholders will receive 1.05 shares of United common stock for each Continental common share they own. Based on United's closing price of $21.60 on Friday, and Continental's 139.6 million outstanding shares as of April 21, United would pay $3.17 billion for Continental, or $22.68 a share.

That represents a 1.5 percent premium over Continental's closing price on Friday.

Based on current shares outstanding, the combined company would have 314.5 million shares, and UAL shareholders will own roughly 55 percent.

Continental Chief Executive Jeff Smisek will be CEO of the new holding company, which will be called United Continental Holdings Inc. UAL CEO Glenn Tilton will be non-executive chairman.

Smisek, 55, will become executive chairman when Tilton steps aside, expected two years after the merger closes.

One-time merger costs of about $1.2 billion are expected over a three-year period. The companies said they expect to receive government approval and complete the transaction by the end of 2010.

"We do not believe there are any material antitrust concerns," Smisek said. "We have a high degree of confidence that this transaction will close."

NO BIG JOB CUTS PLANNED

Tilton said in a message to employees on Monday that "some reductions in the salaried and management workforce" for both companies would result.

But Smisek told Reuters in an interview that rank-and-file employees would see little impact on their numbers.

"To the extent there are some degree of overlaps at airports where we can achieve some efficiencies, we would anticipate handling those in the interim through normal attrition, retirement and voluntary programs," he said. "We don't think that will be substantive."

The Air Line Pilots Association, which represents pilots at both UAL and Continental, has indicated its tentative support for the deal. In a statement on Monday, the UAL ALPA chapter said support from the pilots is "pivotal" to the merger's success.

The International Association of Machinists and Aerospace Workers said in a statement that it was concerned about the effect of the merger on benefits and job security of its more than 26,000 members at both carriers.

Both ALPA and IAM have seats on UAL's board of directors.

"The major issue is going to be whether labor supports the deal, and I think they will because I think they'll see that the combined company is going to be much more profitable than either one individually is as a stand-alone, and they'll view that as a way of recouping some of their lost wages more quickly," CRT's Derchin said.

CONSOLIDATION OUTLOOK

UAL previously was in talks with US Airways Group. It was those talks that prompted Continental to enter discussions with UAL.

"When I saw in the newspaper that they were talking to another company -- and since they are the best partner for Continental -- I gave Glenn a call and we began our talks," Smisek said.

"We moved at warp speed," he added.

Now analysts are speculating on other merger prospects.

"It leaves (AMR Corp's) American Airlines really out of the gold, and that's kind of funny in light of the fact that not too long ago they were the largest of the legacy carriers," said airline consultant Doug Abbey.

Morningstar equity analyst Basili Alukos said AMR might be a good match for JetBlue Airways. The companies recently announced a code-share partnership.

"I would imagine that's a first step toward a merger," Alukos said.

(Reporting by Kyle Peterson in Chicago, Deepa Seetharaman in New York and Karen Jacobs in Atlanta; Editing by Dan Lalor, Derek Caney and John Wallace)










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