As if the airline industry wasn’t consolidated enough, Alaska Air confirmed Monday its plans to acquire Virgin America in an all-cash $2.6 billion deal.
Chad Bray of The New York Times had they day’s news:
Alaska Air Group, the parent of Alaska Airlines, said on Monday that it had agreed to acquire Virgin America for $2.6 billion in cash.
The deal would unite two domestic carriers that are among the 10 largest in the United States, but that operate in a tier below the industry giants, American Airlines, Delta Air Lines and United Airlines. It would also expand Alaska Airlines’ presence in the lucrative California market, particularly in San Francisco and in Los Angeles, one of Alaska Airlines’ hubs.
The transaction would be the latest tie-up in an industry that has rapidly consolidated over the past decade, concentrating power in the United States air travel market among a few major carriers.
The agreement followed a bidding process that saw Alaska Air and JetBlue Airways square off against each other, but Alaska Air, one of the rare airlines to hold an investment-grade credit rating, ultimately triumphed.
Under the terms of the transaction, Alaska Air will pay $57 a share in cash for Virgin America, representing a 47 percent premium to the target company’s closing price on Friday.
“With our expanded network and strong presence in California, we’ll offer customers more attractive flight options for nonstop travel,” Brad Tilden, the Alaska Air chairman and chief executive, said in a news release. “We look forward to bringing together two incredible groups of employees to build on the successes they have achieved as stand-alone companies to make us an even stronger competitor nationally.”
The CNBC staff had more details on the deal:
Alaska’s offer of $57 per share in cash represents a premium of about 47 percent to Virgin’s Friday’s close.
Including debt, Alaska Air valued the deal at about $4 billion.
Shares of Virgin America soared more than 30 percent in premarket trading on the report.
The deal, which has been approved unanimously by both company’s boards, offers $225 million total net synergies annually at full integration, the companies said.
The transaction is expected to be accretive to adjusted earnings per share in the first full year, and will increase annual revenue by 27 percent to more than $7 billion.
One-time integration costs are expected to be between $300 million and $350 million.
The combined organization will be based in Seattle.
Evercore Group acted as financial advisors to Virgin America, while Bank of America/Merrill Lynch and UBS investment bank acted as lead financial advisors to Alaska Air.
Susan Carey of The Wall Street Journal explained why the deal is a bit unusual:
Virgin America Inc.’s majority owners never had plans to sell the whole airline, which had attracted a devoted following in Silicon Valley in recent years.
But an offer by Alaska Air Group Inc. “came in out of the blue,” in November 2015, putting the low-fare carrier into play, David Cush, CEO of Virgin America, said in an interview.
Five months later, Alaska prevailed as the buyer after fending off bids from JetBlue Airways Corp., the only other serious bidder, which joined the fray in January.
The victory wasn’t cheap. Alaska paid a premium cash price of about $2.6 billion for access to the important California air market, more than $1 billion over Virgin America’s market capitalization on Friday.
Brad Tilden, chief executive of Alaska Airlines parent, said in the same interview that the price seemed right given that Virgin America is a well-run company with good service and a powerful presence in the two biggest California airports.
He said Virgin America has a strong brand, despite its status as the ninth-largest U.S. airline by traffic and its nine-year lifespan. Alaska will “spend a couple of years” exploring how best to exploit that brand while also promoting Alaska Airlines, an 84-year-old airline based in Seattle.
Normally, airline assets are only for sale if the carrier is under financial stress, according to Mr. Cush. But in this case, Alaska “doesn’t have to worry about going in and rehabilitating” the assets it purchased, he said.
