Southwest Airlines Co. (NYSE: LUV) has made an offer to buy competitor AirTran Holdings, Inc. (NYSE: AAI) for about $1.4 billion in cash and Southwest stock. If the deal goes through, Southwest will solidify its position as the leading regional airline in the US.
At $7.69/share, Southwest is offering a hefty 69% premium to AirTran’s last closing price of $4.55. AirTran’s 52-week high prior to the offer was $6.28. AirTran’s shares are down about 28% in the past twelve months, compared with a gain of around 28% for Southwest and a nearly flat 52 weeks for JetBlue Airways Corp.
(NASDAQ: JBLU).
The boards of both companies have approved the deal, which still needs approval from AirTran shareholders, regulators, and fulfillment of the usual closing conditions. Southwest is offering $3.75 in cash and 0.321 shares of stock in exchange for each share of AirTran stock.
Including AirTran’s outstanding convertible notes and the value of its capitalized aircraft operating leases, Southwest values the total transaction at $3.4 billion. As of June 30th, AirTran listed long-term debt of $939 million and other long-term liabilities of $111 million.
Southwest has placed a collar around the deal that could adjust the price to no more than $7.75/share or no less than $7.25/share, depending on the closing price of Southwest stock in the 20 trading days ending 3 days prior to closing. The Wall Street Journal says that AirTran may not solicit competing bids and that there is a $39 million break-up fee in the event AirTran accepts another deal.
The high price offered by Southwest gets the company its first entry into the busiest airport in the US in Atlanta, Georgia. The company also gets its first gates at Ronald Reagan National Airport in Washington, D.C., and additional space at LaGuardia, Boston Logan, and Baltimore/Washington, as well as smaller cities it does not currently serve.
As expected, AirTran shares are up more than 60% at midday, but, perhaps unexpectedly, Southwest shares are also up about 10%, and are within $0.50 of a 52-week high. Southwest shares have already traded about 3 times average daily volume and AirTran shares have traded nearly 32 times average daily volume.
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