AlaskaAir buys Virgin America: The Billion-Dollar Deal

Virgin America
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In agreeing to buy Virgin America for $2.6 billion, Alaska Air Group Inc is betting that the airline industry is so consolidated after years of mergers that what it needs is another takeover.

Though JetBlue also competed fiercely, Alaska simply had more financial firepower. 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. However, under certain circumstances, Virgin would be required to pay Alaska a $78.5 million fee 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. Bank of America and UBS advised Alaska Air on the deal.

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. The first four primary airlines being American, Delta, United and Southwest. Together, they control roughly 85 percent of the country’s airline capacity.

Alaska Chief Executive Brad Tilden said in a statement that the tie up will “make us an even stronger competitor nationally.”

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Sneha Maheshwari

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