United Parent UAL, Continental Approve Airline Merger (Update3)

May 2 (Bloomberg) -- United Airlines parent UAL Corp. and Continental Airlines Inc. agreed to merge in a stock swap valued at $3.7 billion that would create the world’s biggest carrier, people with knowledge of the situation said.

The airlines’ boards approved the transaction today, and the deal will be announced tomorrow, said the people, who asked not to be identified because the terms aren’t public. Their combined equity value would be about $8.3 billion, one person said.

United and Continental together would take the top spot in global traffic from Delta Air Lines Inc., have New York and Washington hubs and be the busiest U.S. carrier on the high-fare routes across the Atlantic and Pacific. Annual cost savings and new revenue should reach $1 billion to $1.2 billion by 2013, the person said.

“These two companies coming together was kismet,” said Ray Neidl, an independent airline analyst based in New York. “It was destined to happen because this creates truly a worldwide system. They need the market size to effectively compete” with Delta, Neidl said.

Name, Headquarters

United’s name and Chicago headquarters will be retained, the people said. Continental Chief Executive Officer Jeff Smisek, 55, will become the CEO of the merged airline, and United’s Glenn Tilton, 62, will be chairman, the people said.

Jean Medina, a spokeswoman for United, and Continental’s Julie King declined to comment.

The $8.3 billion combined value includes the impact of options and convertible securities, a person with knowledge of the terms said. UAL will swap 1.05 shares for each Continental share, the people said.

Based on April 30 closing prices, UAL had the third-largest market value among U.S. carriers at $3.63 billion, followed by Continental at $3.12 billion. UAL gained 13 cents to $21.60 on the Nasdaq Stock Market, while Continental slid 35 cents to $22.35 on the New York Stock Exchange.

Together, the airlines fly to 370 destinations in 59 countries and plan to continue service to all those points, a person with knowledge of the matter said. United and Continental also are ranked third and fourth in the U.S. by traffic.

Fleet, Hubs

United and Continental had almost $29 billion in combined revenue last year. Their main jet fleets total 700 aircraft, and they now employ more than 88,000 workers. In addition to Washington and New Jersey’s Newark airport, their other hubs are in Chicago, Denver, San Francisco, Los Angeles, Houston, Cleveland and Guam.

Delta vaulted to the top of the worldwide industry by traffic after buying Northwest Airlines Corp. in 2008, spurring talks on consolidation across the U.S. industry.     The deal comes two years after Continental, then led by Larry Kellner, came within hours of approving a merger with United before walking away. Smisek was chief operating officer at the time, and succeeded Kellner as CEO in January.

The discussions restarted last month, after the New York Times reported on April 7 that UAL was in separate merger negotiations with US Airways Group Inc.     Two days later, Smisek called Tilton and expressed interest in a merger, said a person with knowledge of the matter. Over the next couple of days, they worked out a timeline to exchange financial information and potentially reach a deal by today, this person said.

US Airways

    UAL put its talks with US Airways on hold to focus on Continental, prompting US Airways to pull out of those negotiations on April 22.     UAL and Continental soon reached agreement on an “at market” stock swap, in which neither side pays a control premium, the people said. It took until April 27 to work out the exact terms. While Continental argued that the ratio should be set based on the airlines’ stock prices before the April 7 leak, United pushed for a more recent period, the people said.     Smisek and Tilton reached a compromise during an April 27 meeting in Memphis, Tennessee, at a Radisson hotel near the airport, said two people with knowledge of the matter. That was where they agreed to set the ratio for the stock swap, the people said.

To contact the reporters on this story: Mary Jane Credeur in New York at mcredeur@bloomberg.net; Zachary R. Mider in New York at zmider1@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net.