United, Continental Agree on Merger Stock Ratio

UAL Corp.’s United Airlines and Continental Airlines Inc. tentatively agreed on an exchange ratio in their all-stock merger of 1.05 shares of UAL for each Continental share, a person with knowledge of the matter said.

United Chief Executive Officer Glenn Tilton and CEO Jeff Smisek of Houston-based Continental have briefed their boards on the terms, said the person, who asked not to be identified because details aren’t public. The CEOs reached their accord at a meeting on April 27, the person said.

A merger may be announced as soon as May 3, people familiar with the situation have said. At today’s closing prices, UAL and Continental were valued at $3.63 billion and $3.12 billion, according to data compiled by Bloomberg. Each Continental share was valued at 1.03 UAL shares.

“United shareholders may feel it’s undervalued,” said Vicki Bryan, a debt analyst at New York-based Gimme Credit LCC. “The board is going to have to justify that.”

The new company may deliver a combination of more than $2 billion in savings and added revenue, Bryan said today in an interview. The merger would produce the world’s largest carrier based on passenger traffic, surpassing Delta Air Lines Inc.

Directors at UAL have scheduled a meeting for today, people have said. Jean Medina, a spokeswoman for Chicago-based United, declined to comment. Continental’s David Messing didn’t return a message. CNBC reported the ratio earlier today.

Atlantic, Pacific

UAL gained 13 cents to $21.60 at 4 p.m. in New York in Nasdaq Stock Market trading, while Continental slid 35 cents, or 1.5 percent, to $22.35 on the New York Stock Exchange.

UAL and Continental are the third- and fourth-largest U.S. airlines by market value and passenger traffic, based on data compiled by Bloomberg.

Together, they would leapfrog Delta for the top spot across both the Atlantic and Pacific among U.S. airlines, with 40 percent and 53 percent of traffic, based on data compiled by Bloomberg. The merged carrier would be No. 2 in Latin America behind AMR Corp.’s American Airlines.

Blending their networks would produce two hubs at U.S. East Coast business centers, United’s at Washington Dulles and Continental’s at Newark, New Jersey. United’s routes include flights between Washington and Moscow, a city not served by Continental.

Overseas Flying

“A merger would be smart in a strategic sense, combining Continental’s strong trans-Atlantic network with United’s strength in the Pacific,” Jim Corridore, a Standard & Poor’s equity analyst in New York, wrote today in a note. He rates UAL as hold and recommends buying Continental.

Continental abandoned merger talks with United in 2008, saying the risks of a tie-up outweighed the rewards. Continental later joined the Star Alliance group of airlines led by United.

Negotiations on a tie-up resumed this month, people have said. US Airways Group Inc. ended its own merger discussions with United on April 22, and said it would remain a stand-alone carrier. The Tempe, Arizona-based company walked away after concluding United favored a Continental deal, people have said.

To contact the reporters on this story: Zachary R. Mider in New York at zmider1@bloomberg.net; Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net

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