The Wall Street Journal
By Susan Carey, Robert Wall and Dana Mattioli
Updated April 4, 2016 7:01 a.m. ET
Alaska Air Group Inc. said Monday morning that it had reached a deal to buy Virgin America Inc., winning a frenzied bidding war with rival JetBlue Airways Corp.
The parent company of Alaska Airlines said it would pay $57 a share for Virgin, a 47% premium to Friday’s closing price, representing a total equity value of $2.6 billion. The Wall Street Journal had reported Sunday that Alaska won the bidding contest for Virgin, whose shares have risen lately on takeover speculation.
Bidding between Alaska and JetBlue was feverish, a person familiar with the matter had told the Journal, with the price continuing to rise. Alaska prevailed in part because of its clean balance sheet, which will allow it to more easily borrow funds for the acquisition, the person said.
A person familiar with the jousting said it was “a fierce back and forth between the two sides, with multiple bids for a number of days.” But ultimately, JetBlue “put the pencil down” because the price had gotten too high.
Virgin may be required to pay Alaska a $78.5 million if the merger agreement is terminated, according to a regulatory filing.
Alaska, an 84-year-old airline based in Seattle, has an investment-grade credit rating, no net debt and $1.3 billion of cash, according to its latest financial disclosures. JetBlue, which began flying in 2000, had $876 million of cash at year-end and an undrawn $600 million credit line. Its debt stood at $1.8 billion. Because of low fuel prices of late, both are highly profitable.
Alaska said it expects the deal, which is expected to close by Jan. 1, 2017, to boost its annual revenue by 27% and to add to its earnings in the first year.
The combination of Alaska and Virgin America, which is expected to undergo scrutiny from the U.S. Justice Department, would create the No. 5 U.S. airline by traffic, eclipsing JetBlue, which currently holds that spot. But the combined company still would be very small compared with the largest four U.S. airlines, all expanded by recent mergers, that control more than 80% of domestic capacity.
Alaska Chief Executive Brad Tilden said in a statement Monday the tie up will “make us an even stronger competitor nationally.”
San Francisco-based Virgin America, which began flying in 2007, is 54%-owned by Richard Branson’s Virgin Group Ltd. and New York-based Cyrus Capital Partners LP. The company went public in November 2014.
The addition of Virgin America would materially boost Alaska’s presence at important airports in San Francisco and Los Angeles. The two have only six routes that overlap and their costs are similar.
Alaska said the combined airlines will have 1,200 daily departures and remain based in Seattle.
For all of 2015, Virgin America’s unit cost—the cost to fly a seat a mile, excluding fuel and profit-sharing—was 7.47 cents. Alaska’s unit cost in its jet division, excluding its commuter planes, was 7.39 cents.
Dubbed an industry hybrid, Alaska is one of the few pre-deregulation airlines to avoid bankruptcy-court protection. The company, a traditional network airline like its larger rivals, has been cutting its costs for more than a decade to fight incursions into its West Coast base by Southwest Airlines Co. and others.
Alaska has low costs but still offers passengers some perks without a plethora of fees. It also expanded its route map and now serves most major markets in the East and Midwest and recently made a big bet on Hawaii. It routinely wins customer-service awards, is known for being punctual and enjoys relative labor peace.
Virgin, which has 57 aircraft, 2,600 employees and carried 7 million passengers last year, only turned profitable in 2013. But it also wins customer-service awards and has a devoted following in Silicon Valley. It recently launched service to Hawaii, Denver and Love Field in Dallas and services transcontinental routes from Los Angeles and San Francisco to the East Coast.
While Virgin is an Airbus operator and Alaska’s jet fleet is exclusively Boeing Co., some experts don’t expect that to matter, given that the economics of operating a single fleet type diminish if the second fleet is big enough to bring advantages. Together, the companies will have a young fleet, with the average aircraft aged 8.5 years.
—Anne Steele contributed to this article.
Original article can be found here: http://www.wsj.com