May 3 (Bloomberg) -- United Airlines parent UAL Corp. and Continental Airlines Inc. agreed to merge in a stock swap valued at $3.7 billion that would create the world’s biggest carrier, people with knowledge of the situation said.
The airlines’ boards approved the transaction yesterday, and the deal will be announced today, said the people, who asked not to be identified because the terms aren’t public. The companies’ combined equity value would be about $8.3 billion, one person said.
United and Continental together would take the top spot in global traffic from Delta Air Lines Inc., with hubs in New York and Washington and the most traffic among U.S. carriers on high- fare Atlantic and Pacific routes. The airlines reignited merger talks last month after negotiations collapsed two years ago.
“This is transformational,” said Vicki Bryan, a debt analyst at New York-based Gimme Credit LLC. “This has really been two years in the making. They did all the heavy lifting in 2008.”
Annual cost savings and new revenue from the merger should reach $1 billion to $1.2 billion by 2013, one person briefed on the plans said yesterday.
United’s name and Chicago headquarters will be retained, while Continental Chief Executive Officer Jeff Smisek, 55, will become the CEO and United’s Glenn Tilton, 62, will be chairman, the people said.
Jean Medina, a spokeswoman for United, and Julie King of Houston-based Continental declined to comment.
Options, Convertibles
The $8.3 billion combined value includes the impact of options and convertible securities, a person with knowledge of the deal said. UAL will swap 1.05 shares for each Continental share, the people said.
Based on April 30 closing prices, UAL had the third-largest market value among U.S. carriers at $3.63 billion, followed by Continental at $3.12 billion. UAL gained 13 cents to $21.60 on the Nasdaq Stock Market on that date, while Continental slid 35 cents to $22.35 on the New York Stock Exchange.
Together, the airlines fly to 370 destinations in 59 countries and plan to continue service to all those points, a person with knowledge of the matter said. United and Continental also are ranked third and fourth in the U.S. by traffic.
Fleet, Hubs
United and Continental had almost $29 billion in combined revenue last year. Their main jet fleets total 700 aircraft, and they now employ more than 88,000 workers. Besides Washington and New Jersey’s Newark airport, their other hubs are in Chicago, Denver, San Francisco, Los Angeles, Houston, Cleveland and Guam.
Delta vaulted to the top of the worldwide industry by traffic after buying Northwest Airlines Corp. in 2008, spurring talks on consolidation across the U.S. industry. The deal comes two years after Continental, then led by Larry Kellner, came within hours of approving a merger with United before walking away. Smisek was chief operating officer at the time, and succeeded Kellner as CEO in January.
Those talks collapsed because “it was a more risky environment at that time” when oil prices exceeded $120 a barrel and economic growth was slowing, Gimme Credit’s Bryan said. Crude traded at $86.26 on April 30 on the New York Mercantile Exchange.
Merger discussions restarted last month. After the New York Times reported on April 7 that UAL was negotiating with US Airways Group Inc., Smisek called Tilton two days later and expressed interest in a merger, said a person with knowledge of the matter. Over the next couple of days, they worked out a timeline to exchange financial information and potentially reach a deal by yesterday, this person said.
US Airways
UAL put its talks with US Airways on hold to focus on Continental, prompting US Airways to pull out of those negotiations on April 22.
UAL and Continental soon reached agreement on an “at market” stock swap, in which neither side pays a control premium, the people said. It took until April 27 to work out the exact terms. While Continental argued that the ratio should be set based on the airlines’ stock prices before the April 7 leak, United pushed for a more recent period, the people said.
Smisek and Tilton reached a compromise during an April 27 meeting in Memphis, Tennessee, at a Radisson hotel near the airport, said two people with knowledge of the matter. That was where they agreed to set the ratio for the stock swap, the people said.
The airlines’ boards approved the transaction yesterday, and the deal will be announced today, said the people, who asked not to be identified because the terms aren’t public. The companies’ combined equity value would be about $8.3 billion, one person said.
United and Continental together would take the top spot in global traffic from Delta Air Lines Inc., with hubs in New York and Washington and the most traffic among U.S. carriers on high- fare Atlantic and Pacific routes. The airlines reignited merger talks last month after negotiations collapsed two years ago.
“This is transformational,” said Vicki Bryan, a debt analyst at New York-based Gimme Credit LLC. “This has really been two years in the making. They did all the heavy lifting in 2008.”
Annual cost savings and new revenue from the merger should reach $1 billion to $1.2 billion by 2013, one person briefed on the plans said yesterday.
United’s name and Chicago headquarters will be retained, while Continental Chief Executive Officer Jeff Smisek, 55, will become the CEO and United’s Glenn Tilton, 62, will be chairman, the people said.
Jean Medina, a spokeswoman for United, and Julie King of Houston-based Continental declined to comment.
Options, Convertibles
The $8.3 billion combined value includes the impact of options and convertible securities, a person with knowledge of the deal said. UAL will swap 1.05 shares for each Continental share, the people said.
Based on April 30 closing prices, UAL had the third-largest market value among U.S. carriers at $3.63 billion, followed by Continental at $3.12 billion. UAL gained 13 cents to $21.60 on the Nasdaq Stock Market on that date, while Continental slid 35 cents to $22.35 on the New York Stock Exchange.
Together, the airlines fly to 370 destinations in 59 countries and plan to continue service to all those points, a person with knowledge of the matter said. United and Continental also are ranked third and fourth in the U.S. by traffic.
Fleet, Hubs
United and Continental had almost $29 billion in combined revenue last year. Their main jet fleets total 700 aircraft, and they now employ more than 88,000 workers. Besides Washington and New Jersey’s Newark airport, their other hubs are in Chicago, Denver, San Francisco, Los Angeles, Houston, Cleveland and Guam.
Delta vaulted to the top of the worldwide industry by traffic after buying Northwest Airlines Corp. in 2008, spurring talks on consolidation across the U.S. industry. The deal comes two years after Continental, then led by Larry Kellner, came within hours of approving a merger with United before walking away. Smisek was chief operating officer at the time, and succeeded Kellner as CEO in January.
Those talks collapsed because “it was a more risky environment at that time” when oil prices exceeded $120 a barrel and economic growth was slowing, Gimme Credit’s Bryan said. Crude traded at $86.26 on April 30 on the New York Mercantile Exchange.
Merger discussions restarted last month. After the New York Times reported on April 7 that UAL was negotiating with US Airways Group Inc., Smisek called Tilton two days later and expressed interest in a merger, said a person with knowledge of the matter. Over the next couple of days, they worked out a timeline to exchange financial information and potentially reach a deal by yesterday, this person said.
US Airways
UAL put its talks with US Airways on hold to focus on Continental, prompting US Airways to pull out of those negotiations on April 22.
UAL and Continental soon reached agreement on an “at market” stock swap, in which neither side pays a control premium, the people said. It took until April 27 to work out the exact terms. While Continental argued that the ratio should be set based on the airlines’ stock prices before the April 7 leak, United pushed for a more recent period, the people said.
Smisek and Tilton reached a compromise during an April 27 meeting in Memphis, Tennessee, at a Radisson hotel near the airport, said two people with knowledge of the matter. That was where they agreed to set the ratio for the stock swap, the people said.