Southwest Agrees to Buy AirTran for $1.4 Billion

Sept. 27 (Bloomberg) -- Southwest Airlines Co., the largest U.S. low-fare carrier, agreed to buy AirTran Holdings Inc. for about $1.4 billion in cash and stock, giving it access to Atlanta, the world’s busiest airport.

In the past five years, the U.S. airline sector has seen 9 acquisitions of publicly traded companies with an average premium of 34 percent, according to data compiled by Bloomberg. Southwest is paying 5.4 times AirTrans earnings before interest tax depreciation and amortization, compared with the median multiple of 4.8.

Atlanta, AirTran’s biggest hub, is the largest U.S. market Dallas-based Southwest doesn’t already serve. The purchase also fulfills Southwest’s goal of adding flights to Mexico and the Caribbean, and expands its presence at New York’s LaGuardia and Boston’s Logan airports.

“It’s a perfect fit,” said Ray Neidl, an analyst at Maxim Group LLC in New York who doesn’t rate the stocks. “This fills a big hole in the southeast for Southwest, and they’re getting a very good asset while also eliminating a competitor that would have overlapped with them eventually.”

This is the first acquisition in at least the past five years for Southwest, according data compiled by Bloomberg.

AirTran Value

The offer values Orlando, Florida-based AirTran at $7.69 a share, 69 percent more than its closing price on Sept. 24, Southwest said today in a statement. The transaction price includes AirTran’s convertible notes.

Southwest declined 7 cents to $12.21 at 8:57 a.m. before the start of New York Stock Exchange composite trading. Before today, the shares had advanced 7.4 percent this year. AirTran jumped $2.71, or 60 percent, to $7.26. Through Sept. 24, its shares had dropped 13 percent this year.

The acquisition “takes a significant step toward positioning us for future growth,” Southwest Chief Executive Officer Gary Kelly said in the statement.

The merger announcement comes as United Airlines parent UAL Corp. merges with Continental Airlines Inc., creating the world’s biggest carrier.

Under the agreement, each of AirTran’s common shares will be exchanged for $3.75 in cash and 0.321 shares of Southwest common stock. Including AirTran debt and capitalized aircraft operating leases, the transaction has a total value of about $3.4 billion, the airlines said.

Convertible Notes

AirTran’s debt as of June 30 included about $280 million in convertible notes, according to a July regulatory filing.

Southwest will partially fund the purchase with $670 million from its cash on hand. The Dallas-based carrier has $3.3 billion in cash and short-term investments, and an available $600 million revolving credit line.

The combined carrier will have 43,000 employees and will serve more than 100 airports in the U.S., Mexico and the Caribbean.

The combination will add Boeing Co.’s 717 to Southwest’s fleet of Boeing 737s. The fleet will total 685 active aircraft.

Citigroup Global Markets Inc. and Dahlman Rose & Co. served as financial advisers to Southwest Airlines. Vinson & Elkins LLP acted as legal counsel.