Delta Air Lines Inc., one year removed from bankruptcy, agreed to buy Northwest Airlines Corp. in a $3.63 billion stock deal that would create the world's largest carrier and may unleash more industry consolidation.
The airline will keep Delta's name, Atlanta headquarters and Chief Executive Officer Richard Anderson, 52. The purchase will produce a total of $1 billion in new revenue and savings and won't shut any hubs, the companies said yesterday.
Delta, the third-biggest U.S. airline by traffic, is betting that combining with Northwest, the fifth-largest, will help overcome a 77 percent increase in jet fuel over 12 months. It will control about 25 percent of the U.S. air-travel market, estimates Ray Neidl, a Calyon Securities analyst in New York.
``The assumptions are fairly optimistic,'' said George Hamlin, managing director of New York-based consulting firm ACA Associates. ``Given high fuel prices and going into a recession, it makes you wonder how things will improve.''
The move also is likely to hasten merger talks among rivals including United Airlines to counter Delta's wider network.
Continental Airlines Inc., No. 4 in the U.S. by traffic, has held talks with UAL Corp.'s United, the world's second- largest carrier, and has met with American, a person with knowledge of the matter said Feb. 15.
`Dominoes'
``Expect dominoes to fall,'' Bear Stearns & Co. analyst Frank Boroch in New York said today in a note to investors. He rates Delta and Northwest as ``outperform,'' while the New York- based Neidl recommends Delta as ``add'' and has a ``neutral'' rating on Northwest.
Delta gained 2.1 percent to $10.70 at 9:12 a.m. before the start of regular New York Stock Exchange composite trading, while Northwest climbed 7.8 percent to $12.10.
Delta and Northwest and their regional partners carried 176 million people last year. The combined carrier would vault past AMR Corp.'s American Airlines as the world's largest by traffic, and would have 800 aircraft and 75,000 employees.
Each Northwest share will be exchanged for 1.25 Delta shares, giving Northwest investors $13.10, or 16.8 percent more than yesterday's closing price, the airlines said. The deal will include one-time cash costs of $1 billion, the companies said.
Northwest CEO Doug Steenland, 57, will sit on the new airline's board and Delta's Ed Bastian will keep his roles as president and chief financial officer.
Shareholder Approval
Shareholders of Delta and Eagan, Minnesota-based Northwest will have to approve the transaction, which also would need clearance from federal antitrust regulators. While Delta pilots would get a 3.5 percent equity stake in the airline and a board seat under a new contract, Northwest's pilots said they would ``aggressively oppose'' the tie-up.
The projected revenue and savings are in line with expectations, UBS Securities analyst Kevin Crissey in New York said today in a note to investors. Still, he said he may reduce his earnings estimates because of the rising price of jet fuel. He has a ``neutral'' rating on Delta and Northwest.
The slowing U.S. economy, which is starting to damp travel demand, also is weighing on the industry.
Industry Losses
The eight largest U.S. carriers may post a combined first- quarter loss of $1.4 billion, Merrill Lynch & Co. analyst Michael Linenberg wrote yesterday in a note to clients. AMR leads off the airlines' earnings reports tomorrow.
Four small U.S. airlines filed for bankruptcy in the past month: Frontier Airlines Holdings Inc., Skybus Airlines Inc., Aloha Airgroup Inc. and ATA Airlines Inc.
Delta's biggest contributions to the new carrier include trans-Atlantic routes to Europe and a network in Latin America, while Northwest has Pacific routes including access to the restricted Narita airport in Tokyo.
Adding overseas flying was part of each airline's strategy to return to profit after bankruptcy.
``With Delta and Northwest bulked up, they can compete globally,'' former Continental CEO Gordon Bethune said yesterday in an interview. ``They will have enough of the market that if they say, we need another $5 per ticket, they can get it.''
Bethune was an adviser to hedge fund Pardus Capital Management LP, which backed a Delta-UAL tie-up last year.
U.S. Hubs
Delta has U.S. hubs at Atlanta, New York's Kennedy airport, Cincinnati and Salt Lake City. Northwest's are in Minneapolis, Detroit, and Memphis, Tennessee. Northwest also operates hubs in Amsterdam and Tokyo.
The new Delta doesn't plan to further cut capacity as part of the tie-up, Anderson said yesterday on a conference call with reporters. Delta said in March it will cut 2,000 jobs and lower capacity by 10 percent, double its previous goal, and Northwest said it would halt hiring and cut capacity by 5 percent.
``No, there's not any contemplated,'' Anderson said of additional capacity cuts. ``Until we have antitrust approval, you can't really jointly plan.''
Delta's financial advisers were Greenhill & Co. and Merrill Lynch & Co., and its legal advisers were Wachtell, Lipton, Rosen & Katz and Hunton & Williams.
Northwest's financial advisers were Morgan Stanley and JPMorgan Chase & Co., and the carrier's legal advisers were Simpson Thacher & Bartlett and O'Melveny & Myers.
The deal caps five months of industry speculation about Delta's intentions after revealing on Nov. 14 that it created a board committee to study merger options.
Grinstein's Prediction
For Delta's Anderson, the accord fulfills the prediction made 13 months ago by predecessor Gerald Grinstein that Delta would become ``an acquirer'' after spurning a hostile takeover bid from US Airways Group Inc. in bankruptcy. Delta and Northwest discussed a tie-up before leaving court protection in April and May of 2007, respectively.
Acquiring Northwest also puts Anderson back in charge of the airline where he was CEO from 2001 through 2004. His lieutenants at Northwest included Steenland.
Talks on the transaction stalled in February after pilots couldn't agree on how to mesh union seniority lists.
Delta and its 7,000 pilots broke the impasse in the past few days with a new labor agreement running through 2012 that includes the equity stake. Northwest's 5,000 pilots would be asked to join a unified contract before the deal closes.
`Aggressively Oppose'
``This agreement clearly disadvantages NWA pilots,'' Dave Stevens, chairman of the Northwest chapter of the Air Line Pilots Association, said in a statement. Stevens said pilot leaders at Northwest ``will use all resources available to aggressively oppose this merger.''
Non-pilot employees of both companies in the U.S. will be given a 4 percent equity stake when the deal closes, the companies said, adding that they don't expect to make any involuntary layoffs.
In addition to the board seat going to the Delta pilots, the new airline will have seven directors from Delta and five from Northwest, the companies said.
Delta's 6.8 percent bond due August 2022 fell 0.45 cents to 96.41 cents per dollar face value on Feb. 12, the last day with trading data, according to Trace, the bond-price reporting system of the NASD. The yield rose at that time to 7.22 percent.
Northwest's 7 percent bond due November 2019 fell 4.74 cents to 93.5 cents on April 7, the last day Trace has trading data. The yield rose to 7.894 percent.
Credit-default swaps on Delta debt were unchanged at 1,183 basis points on April 9, the last day with such data, according to CMA Datavision in New York. The contracts are designed to protect bondholders against default. A drop in price indicates an increase in the perception of a company's credit quality.
Northwest had 277 million shares outstanding, Delta's Bastian said yesterday. It had 236.4 million shares as of Jan. 31, according to Bloomberg data.
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