Southwest-AirTran Merger Worth $3.4 Billion – Becomes Largest Domestic Carrier

Filed in Uncategorized by on September 27, 2010 0 Comments

Southwest Airlines has aggressive plans to buy AirTran Holdings for $1.4 billion, based on an announcement today.  However, the total deal, including AirTran’s debt is worth $3.4 billion.  Southwest’s acquisition of AirTran, another low cost domestic carrier, would make it the largest commercial passenger airliner in the United States, surpassing Delta Airlines (DAL).

Background of why Southwest plans to buy AirTran?

The Southwest (LUV)-AirTran (AAI) consolidation factors in the future growth and cost basis into the $1.4 billion acquisition.  Southwest Airlines plan to buy the low-cost carrier includes a priced-in value of $7.69 per share or nearly 70% appreciation premium above the most recent closing price of $4.55 last Friday.  Based on that announcement, AirTran’s securities shot up to $7.10 per share in pre-market trending, according to CNN Money. Conversely, the announcement of the acquisition of AirTran led to a drop in Southwest’s stock price that hovered around a 4% depreciation.  To some, the plans by Southwest Airlines to buy rival AirTran, is no surprise.

Southwest Airlines currently has its main hub at McCarren Airport in Las Vegas, and has been plagued with faltering initiatives brought on by the recession.  The popular airliner had plans to tap into larger markets, offering more routes as well as plans to bolster growth in international markets, based on their business model, according to the WSJ.

More routes means more costs savings and increased shareholder value

CEO of Southwest Airlines, Gary Kelly says the plans to buy AirTran is very strategic in that it provides increased shareholder value, and allows the company to revive its failed international ventures.  Kelly said that the expansion will allow his company to have more presence in larger markets like Boston, Baltimore (BWI), Atlanta (Hartsfield), and NYC, to name a few.  The Southwest-AirTran merger represents “significant opportunities”, said Kelly.

The announcement of Southwest’s plans to buy AirTran comes just on the heels of the Contintental (CAL)-United Airlines (UAUA) consolidation that was approved on September 17.  That merger created the largest airline company in the world.

Based on the terms of the planned Southwest-AirTran merger, shareholders of AirTran are set to receive .321 of a share of Southwest for every share of AirTran. Shareholders will also receive $3.75 in cash.

Analysts from both companies expect the deal to be formally approved in the first fiscal quarter of next year.  They also believe Southwest’s acquisition of AirTran will amount to a cost savings of $400 million over the next three years.

©2010 by Brad Bechler for Gather.com, All rights reserved

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