Northwest strings stay attached as Continental regains control.
December 1, 2000
Investors this summer speculated Continental Airlines Inc. was ripe to be swallowed by a larger carrier.
A tailwind behind the takeover talk: Salomon Smith Barney in June trumpeted Houston-based Continental as "a likely acquiree." The old-guard Wall Street firm, a unit of financial services behemoth Citigroup, went on to bill Continental as a logical fit into Delta Airlines Inc.
Other securities industry insiders envisioned a Delta buyout of Continental, too.
But, given new developments this week, analysts say Continental will likely continue to fly solo -- unless alliance partner Northwest Airlines Corp. is itself acquired.
The U.S. Department of Justice on Monday approved a proposed settlement of its antitrust case against Northwest Airlines. The accord requires Minnesota-based Northwest to sell back a controlling interest it acquired in the Houston company two years ago: Continental now will purchase 6.7 million of its "Class A" shares from Northwest for $450 million.
At first glance, under the newly approved settlement, Continental appears to regain its independence -- emerging as master of its fate amid widespread predictions of consolidation in the airline sector.
Not so fast.
"Northwest still has veto power over any transaction" that would involve the acquisition of Continental, says Ray Neidel, airline equity analyst at ING Barings.
Note: the article says nothing about Northwest having "first right of refusal" as DeltaSFO has indicated, but rather veto power
The article goes on to say:
Northwest receives the right to influence the future make-up of the industry, to some extent, notes Michael Linenberg, an equity analyst at Merrill Lynch.
Other Wall Street insiders put it more strongly. Northwest "still maintains its crucial consolidation `catbird seat´," Salomon Smith Barney notes in a report published last month before the Justice Department´s approval of the settlement was announced.
"Should someone -- let's say Delta -- wish to purchase Continental outright with no proposed change in control at Northwest, such third party would still need to obtain approval from Northwest," Salomon adds.
Still, Merrill Lynch sees the settlement as a positive for Continental shareholders. "Northwest's role in the governance of Continental has been diminished," notes analyst Linenberg.
Continental is issuing preferred shares to Northwest, allowing the Minnesota carrier to retain its power to veto the sale of Continental to a rival.
Meanwhile, recent insider selling in Continental shares by top executives suggests the Houston-based carrier isn't on the verge of selling itself for a tidy premium. Since the end of the first quarter, according to Thomson Investors Network, Continental insiders have shed or filed their intent to sell company stock worth more than $70 million.
At $61.63 Tuesday, Continental "A" shares had doubled from their 52-week low. The stock hovers about 10 percent off its 52-week high of $68.50, reached in early November when Continental and Northwest agreed on the settlement.
Under their deal, Continental is purchasing the 6.7 million "A" shares from Northwest for about $67.26 per share, Salomon notes. Northwest also hangs on to about 2.6 million shares of Continental "Class B" stock, which was near $47 Tuesday.
In May takeover rumors swirled around Continental and other airline stocks after United Airlines parent UAL Corp. announced a bid to acquire U.S. Airways at a substantial premium. The Justice Department has yet to issue a final ruling on the UAL-U.S. Air tie-up, which is hardly a slam dunk in the eyes of analysts.
Continental "has speculative appeal as a potential acquisition target should currently proposed airline mergers succeed," notes Standard & Poor's equity analyst Stephen Klein.
Plus, Continental has aggressively repurchased its stock, enhancing earnings per share. Mix in passenger demand, and Continental would leave the gate as an enticing catch for a bigger carrier.
But for now, an acquisition of Continental looks unlikely, unless its long-term alliance with Northwest is rerouted by the takeover of the Minnesota-based carrier.
If the Justice Department green lights UAL's proposed buyout of U.S. Air, takeover buzz will pick up. And, according to Salomon, Northwest and Continental will each be takeover bait for potential acquirers Delta, UAL and American Airlines parent AMR Corp. Continental remains independent, but its top executive believes other airline acquisitions will eventually take wing.
"Consolidation in the airline industry may or may not be imminent," Continental Chairman and CEO Gordon Bethune said in a speech this summer. "But it does seem to be inevitable."
Is there a difference between having first right of refusal and having veto power? If so, this article leads me to believe that Delta would have to acquire Northwest if it wanted Continental.
From the Atlanta Business Chronicle:
Delta, Northwest, and Continental airlines in consolidation talks
January 31, 2001
On the heels of consolidation by competitors, Atlanta-based Delta Air Lines Inc. (NYSE: DAL) has begun consolidation talks with Continental Airlines (NYSE: CAL) and Northwest Airlines (Nasdaq: NWAC), according to the Wall Street Journal.
Representatives from the three airlines would not comment on the talks, but the paper reported discussions included whether Northwest would veto a Delta purchase of Continental and the possibility of a merger between Northwest and Continental.
AMR Corp., parent of American Airlines, and Trans World Airlines Inc., recently announced merger plans, as have UAL Corp., parent of United, and US Airways.
In Wednesday afternoon trading, Delta sock was down 28 cents to $46.85 a share, while Northwest stock was up 81 cents to $26.19 a share and Continental stock was up $1.13 to $52.29 a share.
So let's say Delta wants to acquire Continental. Is there even a remote possibility that Northwest would ok the deal? It seems hard to imagine, but I guess anything is possible. If not, and Delta's announcement on Monday has to do with all three airlines merging, would the DOJ approve it? This also seems hard to imagine, but if it's one thing I've learned in the past three weeks it's "Never say never". Still, two airlines merging is complicated enough, but three? I shudder to think about it. Or, as some others have speculated both in this thread and ones from several months ago, Could Continental be the acquiring entity (of Delta) and leave Northwest out in the cold? Ugh..too many possibilities.
Monday should be interesting.
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