NEW YORK (CNNfn) - Northwest Airlines and Continental Airlines moved to settle the government's antitrust case against them by agreeing Monday that Northwest would sell a block of Continental stock back to Continental for $450 million.|
Houston-based Continental (CAL: Research, Estimates), the No. 5 U.S. airline, will repurchase about 6.7 million common, the companies said in a statement Monday. St. Paul, Minn.-based Northwest (NWAC: Research, Estimates), the No. 4 U.S. airline, will retain about 2.6 million preferred Continental after a recapitalization of Continental.
The agreement sent shares of Continental down $3.38, or about 6 percent, to $48.63, while shares of Northwest edged up 63 cents to $28.75.
The antitrust action, which had gone to trial last week after pending for† more than two years, charged that Northwest's 14 percent stake in Continental, which included control of more than 50 percent of voting shares, violated antitrust laws and could hurt service and stifle competition. Regulators said Monday's agreement to sell the stake was the result they had been seeking.
"It will ensure that Northwest and Continental remain independent competitors," Douglas Melarned, acting assistant attorney general in charge of the Justice Department's antitrust division, said in a statement.
In January 1998, Northwest bought the stake in Continental, from Air Partners LP for $519 million. The partnership received the stake, along with the control of voting shares, for helping Continental emerge from bankruptcy. The agreement ended talks of a purchase of Continental by No. 3 Delta Air Lines Inc. (DAL: Research, Estimates)
At the time the suit was filed in October, 1998, Northwest insisted that its deal with Continental was not a merger, and that Continental would remain an independent and competitive airline. It portrayed the deal as a way to bring stability to the alliance and create a network to compete with the so called "Big Three" U.S. carriers -- No. 1 United Airlines, owned by UAL Corp. (UAL: Research, Estimates), No. 2 American Airlines, owned by AMR Corp. (AMR: Research, Estimates), and No. 3 Delta.
Under the alliance, the airlines keep separate names, fleets and employees, and making independent scheduling and fare decisions. But the two carriers have linked their route systems, allow passengers to book seats on the other's flights, and have reciprocal frequent-flier programs.
The agreements struck Monday between Northwest and Continental terminate the restriction on Northwest's ability to influence Continental operations, the companies said. But it does give Northwest the ability to block any purchase of Continental by another carrier.
As part of the recapitalization, Continental will reclassify each share of its Class A common stock into 1.32 shares of Class B common stock.
Continental will issue preferred stock that will give Northwest the right to block certain business combinations, and similar change of control deals involving Continental and a third party major airline.
The airlines also agreed to revise and extend their alliance through 2025.† Both Continental and Northwest expect to execute the transaction by next week, and also expect to close it in two months.
Continental and Northwest plan to petition U.S. District Court Judge Denise Hood jointly for a seven-day delay in the trial to allow both airlines to conclude the agreements. In addition to the Justice Department, the pact needs approval from the boards of both airlines and certain third parties, the companies said.
Continental stock rose 81 cents to $52.81 in morning trading Monday, while Northwest gained 94 cents to $29.06.