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UAL, Continental Said to Study Merger With No Premium (Update1)
April 23, 2010, 1:19 PM EDT

April 23 (Bloomberg) -- UAL Corp.’s United Airlines and Continental Airlines Inc. are studying a stock-for-stock merger with no premium, two people with knowledge of the talks said, in a deal that would create the world’s largest carrier.

Continental Chief Executive Officer Jeff Smisek, 55, would run the combined company as CEO while United’s Glenn Tilton, 62, would be chairman, said the people, who asked not to be identified because details are private. The terms aren’t set, and a deal may be more than a week away, the people said.

Putting the airlines together would form a carrier valued at more than $6 billion. The people described the discussions yesterday after US Airways Group Inc. said that it had ended separate merger talks with United, leaving Continental and United as the focus of industry consolidation.

“This is the right merger at the right time,” said Hunter Keay, an analyst at Stifel Nicolaus & Co. in Baltimore, who recommends buying UAL and Continental. “I don’t see a lot of impediments. Corporate travel is improving, there’s no revenue crisis and oil isn’t $145 a barrel” as it was in 2008 when their negotiations on a tie-up fell through.

Directors and executives for the new airline besides Tilton and Smisek may be drawn from both United and Continental, the people said.

Setting Price

While the airlines have tentatively agreed to a stock merger valuing each company at its market price with no premium, they haven’t determined what prices would be used to compute the exchange ratio, one of the people said. Companies merging in stock transactions typically use the market prices on a given day or the average over a period of time to set the ratio.

Julie King, a spokeswoman for Continental, and Jean Medina, a spokeswoman for Chicago-based United, declined to comment on whether the airlines are in talks.

United and Continental are the third- and fourth-largest U.S. airlines by traffic, trailing Delta Air Lines Inc. and American Airlines. A merged carrier would be bigger than Delta, which took the top spot by buying Northwest Airlines Corp. in 2008. Broader route networks help airlines funnel in more passengers.

Based on yesterday’s closing stock prices, the combined company would have a market value of $6.6 billion. UAL’s value was about $3.64 billion and Houston-based Continental’s was about $2.98 billion, according to data compiled by Bloomberg.

Stock Reaction

UAL rose 3 cents to $21.74 at 1:13 p.m. in New York in Nasdaq Stock Market trading, while Continental gained 30 cents, or 1.4 percent, to $21.73 in New York Stock Exchange composite trading.

The two airlines’ discussions began this month, following talks that started in February between United and US Airways, people have said. US Airways pulled out after concluding that United was more interested in pursuing Continental, people familiar with those talks said yesterday.

The 2008 negotiations between United and Continental collapsed when Continental decided to stay independent. Continental later joined the Star Alliance group of airlines led by United.

Tilton was CEO at the time, after joining United in 2002, while Continental was led by Larry Kellner. Smisek was president when those conversations were held, and took the top spot at Continental in January when Kellner retired.

Passing Delta

Together, United and Continental would leapfrog Delta for the top spot across both the Atlantic and Pacific among U.S. airlines, with 40 percent and 53 percent of traffic, based on data compiled by Bloomberg. The merged carrier would be No. 2 in Latin America behind AMR Corp.’s American.

Blending their route systems would produce two hubs at U.S. East Coast business centers, United’s at Washington Dulles and Continental’s at Newark, New Jersey. United’s routes include flights between Washington and Moscow, a city not served by Continental.

Benefits from a “global network should outweigh any of the near-term costs” of integrating, said Jeff Straebler, a fixed- income strategist at RBS Securities Inc. in Stamford, Connecticut. “They would make a much stronger carrier.”

Management’s next steps in crafting a merger probably will include reaching out to labor groups to ensure a smooth integration, Straebler said.

US Airways’ View

While neither United nor Continental has ever said that any merger talks are under way, Tempe, Arizona-based US Airways confirmed the discussions with United by announcing that the conversations were over.

“Over the past several months, we have studied a transaction with United,” US Airways CEO Doug Parker told employees in a letter. “However, those talks have not progressed to a merger agreement, and for the foreseeable future we intend to remain a stand-alone carrier.”

Smisek didn’t mention United when discussing Continental’s approach to consolidation when he spoke with analysts on a conference call after reporting first-quarter results yesterday.

“We are examining Continental’s options and will take whatever action we believe to be in the best interest of our stockholders, customers, employees and the communities we serve,” Smisek said on the call.

United’s Medina, commenting in a statement issued after US Airways disclosed the talks with UAL, said: “We have long said that we believe this industry would benefit from consolidation, and we thoroughly consider opportunities based on what’s in the best interests of our company, our employees, our customers, our shareholders and the communities we serve.”

newKnow

Thanks acl.

"Most" is a good word, too.

acl65pilot

I figure those shows are on on Sunday morning much like the feel good stuff the FCC makes all radio stations broadcast being on, on Sunday mornings. It is there just because it has to go somewhere.

DAL330drvr

and our stock is up nearly 7%...

tsquare

Not that anybody will notice, but did ya'll see that the darling is doubling the fee for babysitting UMs? SWA...? fee...? say it ain't so.. Maybe people should just throw the kid in a suitcase and it will go for free.

crazypilot

it was a few pages back don't feel like looking it up but someone was talking about landings in 90days!!!

MAKE SURE YOU CALL BEFORE 21 DAYS (i think that is what the pop up says) or YOU WILL NOT BE PAID!!!

call before the 21 days(or whatever it says) and you will be paid!!

if you dequal it is not a full checkride just 3 bounces which includes a v1 cut and finish the pattern single engine!!

just a friendly heads up!!

Pineapple Guy

Don't bother with that one, as it will never fly. That's not what was negotiated, and the issue was discussed.

Superpilot92

Yeah resolutions to correct the problem passed unanimously throughout the LECs but once it got to the trusty MEC level, "Received, No action taken"

Pineapple Guy

Superpilot92, you're talking two different things. If a few LECs pass a resolution, but the majority of the MEC do not decide to direct action, the issue dies. In this case, that action would be to enter negotiations to fix your concern.

But if you want to file a grievance, that implies the company is not living up to some portion of the contract. And I can tell you, in this case, as it relates to longevity, it was negotiated and agreed to by all three parties (DAL, DALPA, and NWALPA) that no pilot would have their pay anniversary date adjusted as a result of the merger. BTW, there are DAL pilots being treated identically to NWA, because that was the process in place when they were hired. It was never changed. Why should your's be changed now?

Nosmo King

Not sure how DAL MEC does business regarding resolutions, but at fNW an Agenda Item could NOT be killed in committee. A committee could recommend a NO vote, but the vote had to be done by the entire MEC. When fNW MEC converted to the subcommittee structure, I got assurance from Bob S. ALPA Nat'l Attorney that no Agenda item would ever disappear unless the entire MEC had a chance to vote (and thus be recorded upon request).

Of course that was before we had heard of EXPUNGING things from the Minutes of the meeting.

I gathered from Bob S. that other MEC's allowed things to die in subcommittee. IMO a bad practice because the MEC Chairman can take items he doesn't like or support and put them in a subcommitee composed of ppl willing to kill the item without debate from a majority of the MEC. This has been mentioned many times earlier in the thread.

Not saying this is what happened to KW and the fNW Grievance resolution, but at some airlines it could happen.