Delta, Northwest directors sign off on airlines' combination
Tuesday, April 15, 2008
ATLANTA -- Delta Air Lines has reached an agreement with Northwest Airlines to take over Northwest and create the world's biggest carrier.
The boards of both companies gave the deal the go-ahead Monday.
Delta said the combined airline will have an enterprise value of $17.7 billion. It will be based in Atlanta, and Delta chief executive officer Richard Anderson will head the combined company.
Under the terms of the transaction, Northwest shareholders will receive 1.25 Delta shares for each Northwest share they own. The exchange ratio represents a premium to Northwest shareholders of 16.8 percent based on Monday's closing stock prices.
The announcement comes a year after the two carriers emerged from Chapter 11 bankruptcy protection. Both carriers are losing money again but are in much better shape than the four smaller airlines that have filed for bankruptcy or gone out of business in recent weeks.
The deal will need antitrust approval, and integrating the work forces of fully unionized Northwest and Delta, where pilots are currently the only major unionized work group, will be tricky.
The joining of Atlanta-based Delta and Eagan, Minn.-based Northwest, if approved by regulators, will result in combined annual revenue of $31.7 billion, vaulting it ahead of Fort Worth, Texas-based AMR Corp.'s American Airlines for the top spot in the U.S.
It would be the biggest carrier in the world in terms of traffic, before any further domestic capacity cuts and any divestitures that might be required by antitrust regulators.
Months of discussions
The agreement comes after several months of merger discussions between Delta and Northwest and at one time between Delta and Chicago-based UAL Corp.'s United Airlines. Analysts believe a Delta-Northwest combination will stand up better to regulatory scrutiny because the two carriers have less overlap, even though a Delta-United combination could create more scale and have greater synergies.
Years of mounting losses forced Delta and Northwest to file for bankruptcy protection in New York on Sept. 14, 2005. Both emerged from bankruptcy as leaner carriers last spring, after shedding billions in costs during their reorganizations.
While in bankruptcy, Delta fended off a hostile takeover bid by Tempe, Ariz.-based US Airways Group Inc.
Delta said its plan to remain on its own would create more value than US Airways' $9.8 billion bid, which Delta argued would not pass regulatory hurdles. The value argument never materialized, as Delta's post-emergence market capitalization started out $1 billion less than US Airways' bid and less than the $9.4 billion to $12 billion Delta projected.
Its market value has fallen precipitously in the months since amid airline industry woes, including high fuel prices and a general inability to gain traction raising ticket prices.
Many analysts predicted an eventual Delta-Northwest merger after Anderson, a former Northwest CEO, was named last August to be the chief executive officer of Delta.
Anderson, who was Northwest's CEO from 2001 to 2004, immediately sought to quiet those suggestions, telling Delta's pilots union chairman the morning his appointment was announced that he believed in Delta's standalone plan and that "he was not coming in as CEO to facilitate a merger with Northwest."
But eight months later, that's what Anderson is doing, and many analysts believe he didn't have a choice amid plummeting airline market values and soaring fuel prices.
Wall Street and some airline executives have pushed for consolidation for years, arguing that too many seats are chasing too few passengers. The resulting discounting has made it hard for airlines to cover their expenses.
However, Northwest and Delta overlap relatively little in the U.S. -- which could actually help them gain antitrust approval. Delta's routes are strongest in the eastern U.S. and to Latin America and Europe. Northwest would complement that with its near-lock in the Midwest along with flights to its Tokyo hub and other points in Asia.
Northwest's Asian routes have been one of its main appeals to other carriers. It and United are the only two U.S. carriers with the rights to pick up new passengers in Japan and fly them farther into Asia. Delta and Northwest also complement each other internationally because they are both part of a marketing alliance that includes Air France-KLM.
U.S. airlines get the majority of their revenue from domestic service, though that trend has shifted in recent years as more carriers, particularly Delta and Northwest, have sought to increase international service.