AirTran Holdings Inc. (AAI) soared 64 percent to $7.31 for the biggest advance in the R2K Index. Southwest Airlines (LUV), the nation’s largest discount carrier, announced on Monday that it had agreed to buy its smaller rival in a transaction valued at $1.4 billion in cash, or $7.69 a share. Southwest’s offer represents a 69 percent premium over the Sept. 24, 2010, closing price of AirTran stock.
“The acquisition of AirTran fits in beautifully with the strategy that we laid out for the next decade,” said Southwest Chairman and CEO Gary Kelly, on a conference call. “I’m happy to say that we have found a way to grow Southwest Airlines profitably.”
As part of the agreement, Southwest will pay about $670 million with available cash and assume $2 billion in AirTran debt. In addition, Orlando, Florida-based AirTran is not allowed to solicit other offers, and any unsolicited bids must be reviewed by both airlines. The deal includes a $39 million breakup fee.
Dallas -based Southwest, which through this acquisition moves into 37 new cities, said the transaction would save $400 million a year by fiscal 2013. It said the one-time costs related to the acquisition and integration of AirTran are expected to be in the range of $300 million to $500 million.
The agreement has been unanimously approved by the boards of directors of each company, and closing is subject to the approval of AirTran stockholders. Including the existing AirTran net indebtedness and capitalized aircraft operating leases, the transaction value is approximately $3.4 billion.
The definitive agreement marks the first combination between major U.S. low-fair carriers.
Shares of Southwest rose $1.22, or 9.93%, at last check to $13.49, while shares of AirTran soared $7.36, or 61.76%, to $7.36.