With the aim of becoming the top carrier on the U.S. West Coast and compete more effectively with larger airlines, Alaska Air Group Inc said that it would buy Virgin America Inc for $2.6 billion in cash.
A premium of about 86 percent from Virgin America's stock price before reports in March that the company was considering a sale is being paid in the deal at $57 a share. While describing the price as steep, analysts said that the merger would strengthen Alaska Air.
"The perception is that they paid a very, very high price," said Sterne Agee CRT analyst Adam Hackel. A strong balance sheet of Alaska Air would help the company handle the cost as it would allow it to raise capital at a low borrowing rate, Hackel said.
Hackel added that Delta Air Lines Inc and American Airlines Group Inc would be given strong competition by the merger. Both the airlines have embarked on major expansions in Los Angeles.
The purchase was termed as a "hard-fought competition" by Alaska Air Chief Executive Officer Brad Tilden. Virgin America is known for its mood lighting and media-rich entertainment on flights and is an offshoot of billionaire Richard Branson's London-based Virgin Group.
JetBlue Airways Corp said in a statement that it had to withdraw its offer for Virgin America after the price reached a very high point.
The American airline industry has shrunk to a handful of companies following a decade of mergers and the Alaska Air deal would create the fifth-largest U.S. airline.
While Alaska Air and its Horizon Air subsidiary account for 5 percent of U.S. domestic flight capacity, Virgin America accounts for about 1.5 percent, said a note of Deutsche Bank analyst Michael Linenberg.
While shares of Alaska Air were down 5.2 percent, and JetBlue fell 3.4 percent, Virgin America stocks were up 42.1 percent at $55.27 in Monday trading.
Branson expressed sadness that Virgin America was changing hands and said that he did not have complete control over the company. Hedge funds own most of the shares in a company where Branson’s holding company owned 24.9 percent of the airline as of March 25.
Branson said on a Virgin Group website that his influence over any takeover would be reduced as the U.S. Department of Transportation stipulated that he take some of his shares in Virgin America as non-voting stock.
"So there was sadly nothing I could do to stop" the Alaska Air deal, he said.
The Virgin America brand might be used in some form, Alaska Air said.
Chief Financial Officer Brandon Pedersen said on a conference call that due to the deal, Alaska Air plans to slow down its share repurchase program this year and probably next.
Once the companies are fully merged, the deal would generate $225 million in annual synergies, Alaska Air said in a statement. A one-time integration costs of $300 million to $350 million is expected by the airline.
There are however several hurdles that the companies need to overcome before the deal is completed. Such hindrances include issues like juggling of the contracts of workers with disparate pay and benefits and seniority. The unions and pilot leadership were on board with the merger, Alaska Air said.
(Source:www.reuters.com)
A premium of about 86 percent from Virgin America's stock price before reports in March that the company was considering a sale is being paid in the deal at $57 a share. While describing the price as steep, analysts said that the merger would strengthen Alaska Air.
"The perception is that they paid a very, very high price," said Sterne Agee CRT analyst Adam Hackel. A strong balance sheet of Alaska Air would help the company handle the cost as it would allow it to raise capital at a low borrowing rate, Hackel said.
Hackel added that Delta Air Lines Inc and American Airlines Group Inc would be given strong competition by the merger. Both the airlines have embarked on major expansions in Los Angeles.
The purchase was termed as a "hard-fought competition" by Alaska Air Chief Executive Officer Brad Tilden. Virgin America is known for its mood lighting and media-rich entertainment on flights and is an offshoot of billionaire Richard Branson's London-based Virgin Group.
JetBlue Airways Corp said in a statement that it had to withdraw its offer for Virgin America after the price reached a very high point.
The American airline industry has shrunk to a handful of companies following a decade of mergers and the Alaska Air deal would create the fifth-largest U.S. airline.
While Alaska Air and its Horizon Air subsidiary account for 5 percent of U.S. domestic flight capacity, Virgin America accounts for about 1.5 percent, said a note of Deutsche Bank analyst Michael Linenberg.
While shares of Alaska Air were down 5.2 percent, and JetBlue fell 3.4 percent, Virgin America stocks were up 42.1 percent at $55.27 in Monday trading.
Branson expressed sadness that Virgin America was changing hands and said that he did not have complete control over the company. Hedge funds own most of the shares in a company where Branson’s holding company owned 24.9 percent of the airline as of March 25.
Branson said on a Virgin Group website that his influence over any takeover would be reduced as the U.S. Department of Transportation stipulated that he take some of his shares in Virgin America as non-voting stock.
"So there was sadly nothing I could do to stop" the Alaska Air deal, he said.
The Virgin America brand might be used in some form, Alaska Air said.
Chief Financial Officer Brandon Pedersen said on a conference call that due to the deal, Alaska Air plans to slow down its share repurchase program this year and probably next.
Once the companies are fully merged, the deal would generate $225 million in annual synergies, Alaska Air said in a statement. A one-time integration costs of $300 million to $350 million is expected by the airline.
There are however several hurdles that the companies need to overcome before the deal is completed. Such hindrances include issues like juggling of the contracts of workers with disparate pay and benefits and seniority. The unions and pilot leadership were on board with the merger, Alaska Air said.
(Source:www.reuters.com)
