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UAL, Continental Said to Study Merger With No Premium

Glenn Tilton, chief executive officer of United Airlines
Glenn Tilton, chief executive officer of United Airlines, speaks during a signing ceremony in Beijing, on March. 29, 2010. Photographer: Bernardo De Niz/Bloomberg

UAL Corp.’s United Airlines and Continental Airlines Inc. are studying a stock-for-stock merger with no premium, two people with knowledge of the talks said, in a deal that would create the world’s largest carrier.

Continental Chief Executive Officer Jeff Smisek, 55, would run the combined company as CEO while United’s Glenn Tilton, 62, would be chairman, said the people, who asked not to be identified because details are private. The terms aren’t set, and a deal may be more than a week away, the people said.

Putting the airlines together would form a carrier valued at more than $6 billion. The people described the discussions yesterday after US Airways Group Inc. said that it had ended separate merger talks with United, leaving Continental and United as the focus of industry consolidation.

“This is the right merger at the right time,” said Hunter Keay, an analyst at Stifel Nicolaus & Co. in Baltimore, who recommends buying UAL and Continental. “I don’t see a lot of impediments. Corporate travel is improving, there’s no revenue crisis and oil isn’t $145 a barrel” as it was in 2008 when their negotiations on a tie-up fell through.

Directors and executives for the new airline besides Tilton and Smisek may be drawn from both United and Continental, the people said.

Setting Price

While the airlines have tentatively agreed to a stock merger valuing each company at its market price with no premium, they haven’t determined what prices would be used to compute the exchange ratio, one of the people said. Companies merging in stock transactions typically use the market prices on a given day or the average over a period of time to set the ratio.

Julie King, a spokeswoman for Continental, and Jean Medina, a spokeswoman for Chicago-based United, declined to comment on whether the airlines are in talks.

United and Continental are the third- and fourth-largest U.S. airlines by traffic, trailing Delta Air Lines Inc. and American Airlines. A merged carrier would be bigger than Delta, which took the top spot by buying Northwest Airlines Corp. in 2008. Broader route networks help airlines funnel in more passengers.

Based on yesterday’s closing stock prices, the combined company would have a market value of $6.6 billion. UAL’s value was about $3.64 billion and Houston-based Continental’s was about $2.98 billion, according to data compiled by Bloomberg.

Stock Reaction

UAL rose $1.28, or 5.9 percent, to $22.99 at 4 p.m. in New York in Nasdaq Stock Market trading, while Continental gained 58 cents, or 2.7 percent, to $22.01 in New York Stock Exchange composite trading.

The two airlines’ discussions began this month, following talks that started in February between United and US Airways, people have said. US Airways pulled out after concluding that United was more interested in pursuing Continental, people familiar with those talks said yesterday.

The 2008 negotiations between United and Continental collapsed when Continental decided to stay independent. Continental later joined the Star Alliance group of airlines led by United.

Tilton was CEO at the time, after joining United in 2002, while Continental was led by Larry Kellner. Smisek was president when those conversations were held, and took the top spot at Continental in January when Kellner retired.

Passing Delta

Together, United and Continental 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.

Blending their route systems 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.

Benefits from a “global network should outweigh any of the near-term costs” of integrating, said Jeff Straebler, a fixed-income strategist at RBS Securities Inc. in Stamford, Connecticut. “They would make a much stronger carrier.”

Management’s next steps in crafting a merger probably will include reaching out to labor groups to ensure a smooth integration, Straebler said.

US Airways’ View

While neither United nor Continental has ever said that any merger talks are under way, Tempe, Arizona-based US Airways confirmed the discussions with United by announcing that the conversations were over.

“Over the past several months, we have studied a transaction with United,” US Airways CEO Doug Parker told employees in a letter. “However, those talks have not progressed to a merger agreement, and for the foreseeable future we intend to remain a stand-alone carrier.”

Smisek didn’t mention United when discussing Continental’s approach to consolidation when he spoke with analysts on a conference call after reporting first-quarter results yesterday.

“We are examining Continental’s options and will take whatever action we believe to be in the best interest of our stockholders, customers, employees and the communities we serve,” Smisek said on the call.

United’s Medina, commenting in a statement issued after US Airways disclosed the talks with UAL, said: “We have long said that we believe this industry would benefit from consolidation, and we thoroughly consider opportunities based on what’s in the best interests of our company, our employees, our customers, our shareholders and the communities we serve.”

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