Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Just because Alaska Air's takeover of Virgin America is in a holding pattern doesn't mean it won't have a smooth landing.

The two companies have agreed to give the Justice Department more time to review their $4 billion merger after meeting with antitrust division chief Renata Hesse last week to address the government's concerns about the transaction, Bloomberg News reported. Alaska Air confirmed the delay on Friday, but said it still expects the deal to close in the early part of the fourth quarter. 

The bad news pushed the spread between Virgin America's share price and Alaska Air's $57-a-share offer to the widest it's been since the transaction was announced in April, a sign that investors are more nervous about the deal getting to the finish line. Virgin America recovered some of its earlier losses on Friday, but was still trading about $3 below the deal price compared with a difference of about $1.50 on Monday. 

Niggling Doubts
Close antitrust scrutiny is making investors more nervous about Alaska Air's takeover of Virgin America.
Source: Bloomberg

Some jumpiness is understandable. The government has come down hard lately against mergers it feels are anti-competitive. Halliburton's $28 billion now-nixed combination with Baker Hughes was one of the bigger causalities, while Aetna's $37 billion deal with Humana and Anthem's $50 billion takeover of Cigna are both in doubt after antitrust challenges.

But it shouldn't be surprising that the Alaska Air-Virgin America combination is coming under close scrutiny. Given how concentrated the airline industry is, it should be expected. Pushing back the deal's deadline is also very different from a formal lawsuit challenging the transaction. Such delays are quite common, and it's telling that Virgin America CEO David Cush said just Monday that the regulatory review was "going according to plan" and that there have been "no bumps in the road." A delay could arguably be a good sign because it indicates the two sides are still engaging with each other and potentially working toward some kind of remedy to address regulators' concerns.

Standing Tough
U.S. regulators haven't been shy about stepping in to challenge deals. Lawsuits or the threat of pushback has been the death knell for many a deal lately.
Source: Bloomberg

There's good reason to think a mutually agreeable solution is possible. Yes, the airline industry is a sore spot for regulators who have faced criticism over the surge of takeovers they've already approved and the behavior that consolidation has allowed. Bill Baer, the previous head of the DOJ's antitrust division and now the department's No. 3 official, started an investigation last year into possible improper collusion between carriers. But of all the airline deals, this would be an odd one to pick on.

Combining Virgin America and Alaska Air seems more likely to enhance competition than reduce it. On their own, neither is that much of a threat to heavyweights Delta, United Continental, American and Southwest, but together they might be. The two companies will be able to offer more flight options, potentially with better fares. As Raymond James analyst Savanthi Syth notes, neither company has demonstrated predatory pricing tendencies even in markets they dominate. And they're not going to wind up all that more dominant as a result of this acquisition.

The big appeal of this deal for Alaska Air is to bolster its position in California. But Alaska Air's domestic seat share on the West Coast (flights originating or terminating in California, Oregon and Washington) would rise only marginally to 22 percent with a deal -- compared with a 26 percent share at Southwest, a 17 percent share at United and 14 percent each at Delta and American, Syth of Raymond James estimates.

Could divestitures still be demanded? Certainly, but that's what delays are for: to hammer out the details of what needs to be sold. American and US Airways didn't have to give up that much to settle a lawsuit brought by the DOJ against the deal in 2013. 

Of course, regulators are always unpredictable. Office Depot and Staples' $6 billion merger fell apart earlier this year after a U.S. judge agreed with the Federal Trade Commission that a combination would reduce competition for business customers, surprising many who felt the death sentence was unwarranted given the significant struggles at both companies and looming competition from Amazon. But there's a good chance that Virgin America and Alaska Air can avoid that same fate.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net