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Alaska Airlines Parent to Buy Virgin America for $2.6 Billion in Cash Alaska Airlines Parent to Buy Virgin America for $2.6 Billion in Cash
(about 13 hours later)
Alaska Air Group, the parent of Alaska Airlines, said on Monday that it had agreed to acquire Virgin America for $2.6 billion in cash. In agreeing to buy Virgin America for $2.6 billion, Alaska Air Group is betting that the airline industry is so consolidated after years of mergers that what it needs is another takeover.
The deal would unite two domestic carriers that are among the 10 largest in the United States, but that operate in a tier below the industry giants, American Airlines, Delta Air Lines and United Airlines. It would also expand Alaska Airlines’ presence in the lucrative California market, particularly in San Francisco and in Los Angeles, one of Alaska Airlines’ hubs. The acquisition of Virgin America, the sleek but embattled young airline that sought to make flying across the United States stylish, would propel Alaska Airlines into the top five American carriers. The deal, announced on Monday, would also prove especially helpful in giving the older airline valuable space at major California airports and lucrative transcontinental routes.
The transaction would be the latest tie-up in an industry that has rapidly consolidated over the past decade, concentrating power in the United States air travel market among a few major carriers. At the same time, Alaska Air must now be careful in how it integrates a brand beloved by its cadre of customers who adore its cheeky image, onboard Wi-Fi and soothing onboard purple lighting.
The agreement followed a bidding process that saw Alaska Air and JetBlue Airways square off, but Alaska Air, one of the rare airlines to hold an investment-grade credit rating, ultimately triumphed. For Alaska Air, buying Virgin America was in some ways a natural consequence of the successive mergers that have already concentrated domestic air travel in four primary airlines: American, Delta, United and Southwest. Together, they control roughly 85 percent of the country’s airline capacity.
Under the terms of the transaction, Alaska Air will pay $57 a share in cash for Virgin America, representing a 47 percent premium to the target company’s closing price on Friday. Putting together Alaska and Virgin America will not create a new airline that can stand toe-to-toe with those bigger companies. But it will create a tougher competitor for JetBlue, with which Alaska competed fiercely to win over the smaller airline, and which it will displace as the country’s fifth-biggest airline.
“With our expanded network and strong presence in California, we’ll offer customers more attractive flight options for nonstop travel,” Brad Tilden, the Alaska Air chairman and chief executive, said in a news release. “We look forward to bringing together two incredible groups of employees to build on the successes they have achieved as stand-alone companies to make us an even stronger competitor nationally.” “The goal is to be the premier airline on the West Coast,” Brad Tilden, Alaska Air’s chief executive, said in a telephone interview on Monday.
Including debt and aircraft operating leases, the deal would be worth as much as $4 billion, Alaska Air said. The move was an ambitious one by Mr. Tilden, an Alaska veteran who became chief executive less than three years ago. Before Monday, the only major acquisition Alaska had made was buying the regional carrier Horizon Air 20 years ago.
News of the potential merger emerged over the weekend. But to Mr. Tilden and his team, gaining additional scale was imperative. While Alaska has been lauded for its organic growth efforts, acquiring slots at desirable airports — particularly high-traffic ones like San Francisco International and Los Angeles International — has been challenging.
The transaction has been unanimously approved by the boards of directors of both companies and is subject to approval by regulators and by Virgin America’s shareholders. The merger is expected to be completed by the beginning of next year. At the same time, Alaska’s traditional hub of Seattle-Tacoma International Airport has been challenged in recent years by Delta. The bigger airline has sought to make Seattle’s airport, known as SeaTac, its own hub for Western flights.
The potential sale of Virgin America comes less than two years after it went public and nearly a decade after it was founded in 2007. Alaska, meanwhile, has cleaned up its financial health. The company has an investment-grade credit rating — rare for an airline — and has more than $1.3 billion in cash on its balance sheet. So it was time to begin hunting.
The airline was the brainchild of Richard Branson, the British billionaire behind an empire of brands that share the Virgin name. “We feel like we’ve done really well with the real estate we’ve had,” Mr. Tilden said. “What can we do to get bigger?”
The idea was to create a new, lower-cost carrier with a higher level of service than that provided by traditional airlines. The search for an acquisition target began about 18 months ago, Mr. Tilden said. By last fall, Alaska contacted Virgin America about a potential combination, beginning an auction process for the smaller airline.
Virgin America, based in the San Francisco area, has a fleet of about 60 single-aisle Airbus planes that fly to 23 airports in the United States and Mexico. The carrier outfits its planes with mood lighting, Wi-Fi and interactive video displays. Virgin America was an ideal takeover target. The company opened for business in 2007 as an additional lower-cost carrier with a higher level of service than that provided by the traditional airlines. It was the brainchild of Richard Branson, the British mogul behind the empire of brands that share the Virgin name.
The airline has developed a devoted fan base, in part because of a quirky sense of humor in its marketing. For example, the airline produced a safety video in 2013 that included choreographed singing and dancing. Since going public in late 2014, Virgin America has largely struggled, with its stock price essentially flat. Analysts have said that the company faced high costs and the pressures of being a low-cost airline whose services ran closer to premium level. Its recent turn to profitability was helped by the tumble in oil prices that also aided its competitors.
Virgin America, which went public in November 2014, was valued at $1.5 billion as of Friday’s market close. Mr. Branson owns about 31 percent of the airline, with the hedge fund Cyrus Capital Partners owning 24 percent. Though JetBlue also competed fiercely, Alaska simply had more financial firepower. In the end, Alaska offered $57 a share — a knockout price, over 80 percent higher than where Virgin America’s stock had been trading before the news of its sale process emerged. Alaska insisted on signing the deal on Friday night to swiftly cut off the bidding contest.
The deal is expected to draw close scrutiny from regulators in the United States, who have concerns that further consolidation in the industry could result in higher prices for consumers. Including debt and aircraft operating leases, the Virgin America deal is valued at about $4 billion.
The Justice Department sued to block American Airlines’ takeover of US Airways in 2013, but it ultimately dropped its antitrust lawsuit after the airlines agreed to give up landing spots at some of the country’s largest airports, including La Guardia in New York, O’Hare International in Chicago and Ronald Reagan National in Washington. The companies said they expected to achieve $225 million in annual cost savings following the merger, after incurring one-time integration costs of $300 million to $350 million. The combined airline would have annual revenue of more than $7 billion, the companies said.
The transaction would allow Alaska Air, which also owns Horizon Air, to leapfrog JetBlue and became the fifth-biggest carrier in the United States. One potential challenge for Alaska and Virgin America is persuading government regulators to approve the deal.
Alaska Air, which is based in Seattle, has steadily moved to expand its network beyond the West Coast, pushing into transcontinental flights as well as those to Hawaii. Its two carriers, Alaska Airlines and Horizon, offer flights to more than 90 destinations in Canada, Mexico and the United States. The Justice Department has begun to take a tougher approach toward airline mergers in recent years, including briefly suing to block the union of American and US Airways.
The companies said that they expected to achieve $225 million in annual cost savings following the merger, after incurring one-time integration costs of $300 million to $350 million. The combined airline would have annual revenue of more than $7 billion, the companies said. But Mr. Tilden said that combining Alaska and Virgin would yield a stronger airline that could better compete against bigger rivals. And putting the two airlines together is meant to expand his company’s network — the two share little overlap in their routes — and not lead to higher prices.
Alaska Air was advised by Bank of America Merrill Lynch, UBS and Cowen & Company and by the law firm O’Melveny & Myers, while Virgin America was advised by Evercore and by the law firm Latham & Watkins. “What I will say is that this is a pro-consumer transaction,” he said. “Alaska and Virgin will be stronger together than on their own.”
Investors in Virgin America appeared thrilled by news of the sale, pushing the company’s stock up nearly 42 percent to $55.11. Shareholders in Alaska, by contrast, were less enthusiastic, as that company’s stock fell 3.8 percent, to $78.93.
But analysts appeared to believe in Mr. Tilden’s long-term planning.
“ALK is paying a steep price for these assets, but we think it is worth the price,” Jim Corridore, an analyst with Standard & Poor’s Capital IQ, wrote in a research note on Monday, referring to Alaska’s ticker symbol.
He added, “We think VA was a price disruptor in the industry, so we think we will see less discounting on those routes,” referring to Virgin America’s symbol.
One prominent investor publicly professed some disappointment in Monday’s announcement: Mr. Branson himself. In a blog post, he lamented American regulations that prevented him from controlling more of Virgin America.
“I would be lying if I didn’t admit sadness that our wonderful airline is merging with another,” he wrote. “There was sadly nothing I could do to stop it.”