Monday, September 27, 2010

SAN FRANCISCO - JANUARY 21: The Southwest Airl... Southwest Airlines to buy AirTran for $1.4 billion
A shot at expanding in Northeast and on international routes

Christopher Hinton, MarketWatch

NEW YORK (MarketWatch) — Southwest Airlines Co. plans to buy AirTran Holdings in a $1.4 billion deal that brings it access to the world’s busiest airport along with a foothold at expanding in the Northeast and becoming an international carrier.

Southwest’s agreement to pay $7.69 a share in cash and stock represents a 69% premium over AirTran’s stock before the deal was unveiled Monday morning. The total payout to take over will be $3.4 billion including debt and aircraft operating leases.

Return of the bolt-on deal

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“The acquisition of AirTran fits in beautifully with the strategy that we laid out for the next decade,” Southwest Chairman Gary Kelly told reporters and analysts on a conference call. “I’m happy to say that we have found a way to grow Southwest Airlines profitably.”

Shares of AirTran soared 58% to $7.20 after the market opened; Southwest’s stock rose 4% to $12.77.

News of the deal sparked trading among airline stocks with JetBlue

Airways adding 6% and US Airways climbing 4.6%. But Delta Air Lines were under pressure.
Southwest estimated it could attract more than 2 million new passengers to Atlanta’s airport through its low-fare service, taking on Delta in its home city.

Southwest said it expects the purchase to add to its earnings within a year after closing, which is likely sometime in the first half of next year. The airlines forecast roughly $400 million in cost savings once combined.

“It’s a smart deal,” said Henry Harteveldt, an analyst with Forrester Research. “It’s cheaper and faster to buy AirTran than to wait and grow organically.”

In acquiring AirTran, Southwest will for the first time serve Atlanta’s Hartsfield-Jackson International Airport, the world’s busiest airport in terms of passenger traffic, particularly for frequent-flying business people, and an unseemly gap in the airline’s route system.

“If we’re trying to win business customers in Chicago, you’ve got to get them to Minneapolis, you’ve got to get them to New York, you have to fly them to Boston, that’s where they want to go,” Kelly said. “And the gaping hole when we do our market surveys around the country -- one of the top markets always the business customers are looking for -- is Atlanta.”

“This deal really won’t help any of the other airlines,” said Roger King, an airline bond analyst for CreditSights. “But it’s really a negative for Delta.”

By expanding its markets in the Northeast, analysts said the merger could also put US Airways, Continental Airlines, and its merger partner UAL Corp. and American Airlines parent AMR Corp. on the defensive as well.

As part of the agreement, AirTran is barred from seeking competing offers, and any unsolicited bids must be reviewed by both airlines. The deal includes a $39 million breakup fee.

AirTran also brings with it several international routes to Mexico and the Caribbean.

“We have the desire ourselves, of course, to prepare for international expansion one of these days, and this will be a wonderful learning experience for us,” Kelly said.

Southwest is planning to upgrade its reservation system to begin tracking international flights, an “ambitious project” that could take 15 to 20 years, the company said.

The agreement to purchase AirTran has already been approved by the boards of both

Now the proposal goes before regulators and AirTran shareholders for approval.

If they agree to the deal, AirTran stakeholders would receive $3.75 in cash and 0.321 share of Southwest for each share of AirTran, subject to certain adjustments. Upon closing, AirTran shareholders would own about 7% of the new company.

Citigroup and Dahlman Rose & Co. acted as financial advisers to Southwest Airlines. Vinson & Elkins L.L.P. acted as legal counsel.

Christopher Hinton is a reporter for MarketWatch based in New York.

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