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News > Deals
United to buy US Airways
May 24, 2000: 7:31 p.m. ET

Largest airline to pay $4.3B cash, assume $7B in debt for No. 6 carrier
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - United Airlines is buying struggling US Airways for $4.3 billion in cash, a move that roiled airline stocks and raised objections from United's powerful pilots' union.

United's parent company, UAL Corp., said it agreed to pay $60 a share for US Airways Group Inc., owner of the nation's sixth-largest carrier -- 130 percent above its closing price Tuesday -- or a total of $4.3 billion. The companies said they expect the deal to be completed next year and reduce United's earnings per share the first year after the close, then increase earnings per share by 35 percent in 2002.

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Under the deal, United also would assume $7.3 billion in debt and aircraft leases in the deal. United earned $1.2 billion last year while US Airways' operating earnings tumbled to $37 million.

While United is an industry leader and US Airways one of the more troubled carriers, the deal would benefit United by filling in a gap it has on north-south routes in the eastern United States.

"The US Airways route system fits very nicely with the United Airlines system," said Ray Neidl, analyst with ING Barings. "If this deal goes through, it would turn the airline industry on its head."

A combination of operational and labor problems at US Airways hurt its performance and stock price severely over the last year, Neidl said.

graphicThe two companies have about $25 billion in combined annual sales and 145,000 workers, 980 aircraft and 4,400 flights a day for their core airlines, as well as thousands of commuter flights.

US Airway's largest shareholder, Julian Robertson, the chairman of Tiger Management, which owns about 25 percent of the airline's shares, told CNNfn Wednesday that he's been involved in talks with the two carriers for the last four months. But talks began in November, according to James Goodwin, UAL's chairman and chief executive, and Robertson, while active in the talks, did not pressure US Airways into selling, said Stephen Wolf, the carrier's chairman.

Robertson said the deal is a good one for investors and employees at both carriers, even though it is well below US Airway share prices in 1998, and was driving down the price of UAL stock on Wednesday. (206KB WAV) (206KB AIFF)

Employee concerns could ground the deal


The deal faces many obstacles, perhaps chief among them the objection of the pilots union. United pilots, who are locked in contentious contract negotiations with management, hold a 25 percent stake and one seat on the board. Overall, employees own 55 percent of the shares, making it the world's largest employee-owned company.

While the pilots union did not close the door on supporting the deal, it raised objections and criticized its timing.

"I am deeply disappointed that the company would enter into a transaction of this magnitude without reaching full agreement with the United pilot group on all issues," said a statement from Rick Dubinsky, chairman of the United group of the Air Line Pilots Association (ALPA) and a member of the UAL board.

graphicDubinsky could not be reached for further comment, and a union spokesman could not say how he voted during Tuesday's board meeting. Herb Hunter, a captain with United and a spokesman for the union, said pilots are at least hopeful that this will lead management to reach a quick contract conclusion with pilots.

"It would make sense to me they would want our support to get a deal of this size done," he said. He echoed the beliefs of others that the proposed deal will bring a new round of consolidation in the sector.

"I can't address if it'll be a good thing or bad thing, but I think it'll be a real thing," he said of additional mergers.

The Association of Flight Attendants said they could not endorse any deal without more details.

"In order to win the support of the flight attendants in the proposed transaction, United must be much more forthcoming with its unions than it has been to this point," the AFA said in a statement.

Goodwin said he believed that employees, including pilots, approved of the strategic direction of the merger.

"I'm very pleased with the reaction we got from unions at United across the board," he said at a New York news conference. "Pilots, like all the employees at both of our companies, are concerned about potential ramifications."




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Wolf, who has a history of contentious relations with the union, repeatedly has threatened to put the carrier up for sale unless unions agreed to cut costs and change restrictive agreements. Wolf is a former chairman and CEO of UAL who lost the top job there when the unionized employees bought the company in 1994. He plans to leave the company when a merger is completed.

While the companies issued some job securities for employees, Jim Higgins, analyst with Donaldson Lufkin and Jenrette, said US Airways pilots are relatively senior as a group, and many United pilots would be bumped back if the merger goes through, making union approval of the deal unlikely.

"A lot of United captains won't be captains the day after this merger," he said.

A bidding war in the air


Some analysts also believe the offer will spark a bidding war for US Airways, or a move for other carriers. Speculation sent the stock of UAL's two largest competitors - number two AMR Corp. and number three Delta Air Lines - plunging Wednesday.

But the value of some of the less successful carriers such as Trans World Airlines (TWA: Research, Estimates), Northwest Airlines (NWAC: Research, Estimates) and America West Holdings Corp. (AWA: Research, Estimates), saw their shares rise, as investors tried to guess which airline might see the next offer. Even number four carrier Continental Airlines (CAL: Research, Estimates) saw its shares rise on some speculation that it could be bought, said Neidl.

graphic"Anything that is green is a takeover target, anything that is red is an acquirer," he said.

DLJ downgraded both UAL and AMR Corp. (AMR: Research, Estimates), the owner of No. 2 carrier American Airlines. Merrill Lynch also downgraded AMR, but could not comment on UAL or US Airways due to its participation in the deal.

American Airlines declined comment on the deal or whether it would make its own bid for US Airways, and officials from Delta (DAL: Research, Estimates) were not available for immediate comment.

Higgins said he believes the winning bidder probably will pay more than $60 a share, while the loser will be left with a weaker position. "I see it as a lose-lose situation," Higgins said. "Integration problems with airline mergers are legendary."

Neidl said he doesn't believe that there will be a higher bid for USAir, given the difficulties in mergers in the industry.




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"It's going to be hard to top that, but it can be topped," he told CNNfn.

Reuters reported there is a relatively modest $160 million break-up fee included in the agreement. Officials with the two airlines said they were confident the deal would get done, even if there were other bidders.

"We are committed to one another," Wolf said at the New York press conference. "If someone else comes along, we'll have to respond in appropriate fashion. But we think it's a very, very good fit."

Goodwin said he's not overly concerned about another bidder.

"Anyone else who wants to look at this great company has to look at it from strategic fit point of view," he said. "Other carriers that may look at it have different strategic needs, or face a different anti-trust scenario."

Still, Higgins estimated the odds of a deal being done for US Airways are only a bit better than 50-50, and that the odds of it being done at $60 a share are less than that. While Neidl doesn't necessarily see the price rising, he also puts the odds of the deal closing about 50-50. Others also see problems.

"The hurdles are so many I don't think they can even count them right now," Michael Miller, editor-in-chief of Aviation Daily, told CNNfn's Ahead of the Curve. "The unions have had a habit of disrupting any deals the management of airlines have wanted to make for the last decade." (101KB WAV) (101KB AIFF)

US Airways (U: Research, Estimates) stock jumped 22-11/16, or 86 percent, to end at 49 on Wednesday, almost double Tuesday's close of 26-5/16. UAL (UAL: Research, Estimates) shares fell 7-3/16, or nearly 12 percent, to close at 53-3/16.

Among other airline stocks AMR dropped 2-9/16, or 7.85 percent, to close at 30-1/16, while Delta shares lost 3-11/16 to end at 51-1/2. Meanwhile, America West shares soared 2-13/16, or 18.4 percent, to 18-1/16. Northwest shares climbed 4-13/16, nearly 20 percent, to 28-15/16, Alaska Air shares gained 1-7/16, or 5 percent, to 30, and TWA rose 1/4, or 12.5 percent, to 2-1/4.

History of consolidation


US Airways held merger talks with United in 1995 after a trans-Atlantic alliance with British Airways (BAY) collapsed, prompting Britain's biggest airline to sell its 35 percent stake in USAir. US Airways then set a marketing pact with American, linking the airlines' frequent flyer programs.

"We decided the time was not right five years ago," said UAL's Goodwin. "Today we see a different scenario. We have a strong United and a vibrant US Air. We are a company in need  a strategic network on the East Coast. US Air clearly fills that void."

Regulators in the United States and Europe, concerned about competition, may require concessions before approving the deal. Regulators at the U.S. Department of Transportation will play second fiddle to the antitrust experts at the Department of Justice.




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A spokesman for DOT said their economists would look at the proposed merger, its impacts on airline competition and advise the DOJ with recommendations. Increased airline competition has been a stated priority of the DOT officials.

Robertson told CNNfn that he believes investors' concerns about regulators blocking the deal is one of the key factors keeping US Airways shares below the bid price in trading Wednesday. But officials with the carriers said a relatively small route overlap should help its chances for approval.

"We're clean from a Justice (Department) perspective," said Wolf.

But House Judiciary Chairman Rep. Henry Hyde, R-IL, expressed concern about the effect of the merger on competition in the skies.

""At a minimum, the proposed merger requires very close antitrust and regulatory scrutiny," Hyde said in a statement. "For many years I have expressed concern about the absence of competition in the airline industry, particularly at fortress hub airports like O'Hare International Airport."

The merger will be discussed at an already scheduled hearing on competition in the airline industry on June 14.

Deal could give birth to start-up carrier


United is proposing to sell some of the combined companies' assets at the congested Reagan National Airport in Washington to alleviate regulators' concerns. It also promised to limit fare hikes for two years except to keep up with rises in inflation or fuels costs.

graphicUS Airways board member Robert Johnson plans to form a new carrier, called DC Air, to take over some of US Airways' Washington assets, but not its lucrative Washington-to-New York shuttle. Johnson is the chairman and chief executive of privately-held BET Holdings, a cable television company that owns Black Entertainment Television and other programming.

Higgins said he doubts the formation of DC Air would answer regulators' concerns.

"They don't want to sell anything that's important," Higgins said. "That (DC Air) is a competitive straw man. A peanut entrant cannot possibly compete with United."

The new carrier would need approval of DOT before it could start operation. Back to top

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