UAL, Continental to form largest airline

(Reuters) - UAL Corp, parent of United Airlines, said it will buy Continental Airlines Inc for about $3.17 billion in stock, forming the world's largest carrier and further shrinks the U.S. airline industry.

Continental shareholders will receive 1.05 shares of United common stock for each Continental common share they own. Based on United's stock price of $21.60 on Friday afternoon, and Continental's 139.6 million outstanding shares as of April 21, United would pay $3.17 billion for Continental, or $22.68 a share.

That represents a 1.5 percent premium over Friday's closing price.

The name of the combined airline will be United Airlines. The name of the holding company will be United Continental Holdings Inc.

Continental Chief Executive Jeff Smisek will run the Chicago-based combined airline with over $29 billion in annual revenue, while UAL CEO Glenn Tilton will be non-executive chairman. Smisek, 55, will become executive chairman when Tilton steps aside, expected two years after the merger closes.

Based on current shares outstanding, the combined company would have 314.5 million shares, and UAL shareholders will own roughly 55 percent of it.

United Chief Tilton said in a message to employees on Monday that that "some reductions in the salaried and management work force" for both companies would result.

If approved by regulators and shareholders, the deal is expected to produce $1 billion to $1.2 billion in annual revenue and cost benefits for the combined company by 2013. One-time costs of about $1.2 billion are expected over a three-year period.

The companies expect to complete the transaction in the fourth quarter of 2010.

The deal marks the first major U.S. airline merger since Delta Air Lines Inc's 2008 purchase of Northwest, and caps months of speculation that more industry consolidation was ahead.

United and Continental said their merger would expand service with minimal domestic and no international route overlap. The combined company will have 10 hubs, with Houston as its largest, and a workforce of nearly 90,000.

The International Association of Machinists and Aerospace Workers said in a statement that it was concerned about the effect of the merger on benefits and job security of its more than 26,000 members at both carriers.

Reporting by Kyle Peterson in Chicago, Deepa Seetharaman in New York and Karen Jacobs in Atlanta; Editing by Dan Lalor and Derek Caney

Reuters