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.”
Sir Richard Branson, Virgin Group’s founder had this to say about the merger:
I would be lying if I didn’t admit sadness that our wonderful airline is merging with another. Because I’m not American, the US Department of Transportation stipulated I take some of my shares in Virgin America as non-voting shares, reducing my influence over any takeover. So there was sadly nothing I could do to stop it.
Our Virgin airline has much more to do, more places to go, and more friends to make along the way. The important thing now is to ensure that once Alaska witnesses first-hand the power of the brand and the love of Virgin America customers for our product and guest experience, they too will be converts and the US traveling public will continue to benefit from all that we have started.
Virgin employees are in for a rough ride as the airline merges into Alaska. Employees were sent this note early this morning:
- Between Announcement Date and Transaction Close:
o We want and need Teammates to join us in the coming months.
o It will take months (estimated 3-9) for our regulatory agencies to review the proposed merger. Only after those reviews are complete may the deal be finalized and the transaction “close.”
o During that time, it will be “business as usual” here at Virgin America.
- Between Transaction Close and Full Operational Integration:
o Industry experience has shown that it can take many months and even years to fully integrate two airlines.
Typically, back end operations are integrated first, with the various components of the operation integrated over time.
In the interim, business continues as usual at Virgin America.o We will need our Teammates during this period.
All of our Pilots, ITMs, Technicians and GSTs are guaranteed positions throughout this period.
Most of our non-frontline Teammates will also be needed to ensure a successful integration, and all of our non-frontline Teammates will be provided with generous retention benefits as a reward for their contributions during this period.For any Teammates whose positions are eliminated or are required to relocate, they will be provided with competitive severance benefits, including cash compensation, health insurance continuation, and three years of space available travel privileges.o All of our seniority work groups will have their seniority rights integrated with Alaska’s employees using a fair and equitable process outlined under federal law (and union merger policy, where applicable).
o Post-integration, the combined carrier will provide many opportunities for its employees.
The combined airline will be much larger, providing greater stability in this competitive environment.
Alaska intends to benefit from our route structure, as well as our California presence.o Many of our Teammates will be asked to contribute to the combined airline.
Alaska has guaranteed that all of our Pilots, ITMs, GSTs and Line MX Technicians will have jobs at the merged airline.Many other Teammates will be offered positions with the combined carrier as well.
Those who are not offered positions, or who choose not to relocate, will be eligible for generous severance benefits (as described above).o All Teammates with seniority rights will be integrated onto the combined seniority list.
McCaskill Bond requires Alaska to provide a fair and equitable process for the integration of seniority lists for every work group with seniority rights.
• This applies to both represented and non-represented employees.
• This law requires the carrier to provide the means to ensure employees are fairly represented in the process.
• In the event the work groups cannot agree on how to integrate the two seniority lists, a neutral third party arbitrator hears and resolves the disputed issues.
For our Pilots, ALPA’s merger policy will apply, as both Pilot work groups are represented by ALPA.
• That policy includes consideration of three factors in determining how to merge lists in a fair and equitable manner – career expectations, longevity, and status and category.
o In the process, our VX pilots will be credited with not only our current fleet size but also our aircraft on order.
o The union will likely be discussing protections for VX pilots in that process in the coming weeks (much more to come on that).
• That policy also envisions negotiations of a joint collective bargaining agreement.
• In reality, we expect that our flight operations will remain separate for some time as the operations and seniority lists are integrated, with VX Pilots operating VX aircraft in the interim.
For our ITMs, Alaska’s flight attendants are currently represented by the AFA and covered by a collective bargaining agreement. We will be looking to the TWU and AFA to sort out representation issues as the two work groups are merged.
All of our other work groups with seniority rights will also participate in the seniority integration process.
• Our Dispatcher seniority list merge with Alaska’s TWU dispatcher list.
• Our GST seniority list, as well as our Scheduler seniority list, will merge with Alaska’s IAM seniority list for airport employees.
• Our Technician seniority list will merge with Alaska’s AMFA seniority list.
• Some of our HQ employees will have their seniority rights merged with Alaska’s IAM clerical group.
• Representation issues (whether our employees will become represented by these unions) will likely sorted out before the National Mediation Board in the coming months.
With the new aircraft we have on order and Alaska’s plans to take advantage of our California presence and route structure, significant growth is expected. That type of growth typically presents opportunities for employees in seniority integration.
• Note, however – do not comment on likely outcomes from the integration process/where our teammates may end up.