Southwest Airlines agreed to acquire AirTran Holdings Inc. for $1.4 billion in cash and stock, the first major merger among healthy U.S. discount carriers.
The proposed deal follows Southwest's failed effort to acquire Denver-based Frontier Airlines earlier this year and would revive its stalled efforts to launch international services by accessing AirTran's network to the Caribbean.
The deal sent shares of fellow discount carrier JetBlue Airways Corp. up 10% to $6.54 while US Airways Group Inc., which has its roots as a low-cost airline from its days as America West, climbing 3.2% to $9.28.
Under the deal, AirTran shareholders will receive $3.75 in cash and 0.321 Southwest share for each share of AirTran, valuing it at $7.69 a share, a 69% premium to Friday's closing price.
There's a bracket around the per-share price at $7.25 to $7.75. After the deal closes, expected in the first half of next year, AirTran holders would have about 7% of the combined company.
Including AirTran's net debt and capitalized aircraft-operating leases, the transaction is valued at about $3.4 billion.
Southwest Chairman and Chief Executive Gary C. Kelly said the move gives the company "significant opportunities" in Atlanta—the largest U.S. market the company currently doesn't serve—and expands its presence in other major airports including New York LaGuardia, Boston and Baltimore/Washington, as well as gaining entry to many smaller domestic cities.
Southwest expects the acquisition to add to earnings in the first year after the deal closes after one-time acquisition-related costs of $300 million to $500 million.
The company sees cost savings of more than $400 million by 2013. Its shares closed Friday at $12.28 and were inactive premarket.
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