Update: Continental to Buy Back Shares From Northwest

The $450 million deal could end an antitrust lawsuit brought by the federal government against the two airlines.
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Updated from 10:58 a.m. ET

Continental Airlines

(CAL) - Get Report

said Monday that it had reached an agreement in principle to repurchase shares held by

Northwest Airlines

(NWAC)

in a $450 million deal likely to end the two-year-old antitrust lawsuit brought by the government against the two carriers.

In a statement released after the airlines' announcement, the head of the

Department of Justice's

antitrust division, A. Douglas Melamed, called Northwest's proposed sale of its controlling interest in Continental a "victory for consumers."

"This is the result we have sought all along," said Melamed, acting assistant attorney general. "It will ensure that Northwest and Continental remain independent competitors."

He added that the Department of Justice would join Northwest and Continental, both defendants in the lawsuit concerning Northwest's 1998 stock purchase, to petition the court for a seven-day delay in trial proceedings to allow the two airlines to finalize details of the agreement. The trial began November 1 after the two airlines failed to reach an out-of-court settlement.

Under the tentative agreement, Continental, the nation's fifth-largest carrier, will repurchase about 6.69 million of its Class A shares for about $67 a share, or a total of $450 million, from Northwest, the fourth-largest U.S. airline. That's a 28% premium based on Continental's opening share price of $52 on Monday.

St. Paul, Minn.-based Northwest will also retain about 2.6 million shares of Class B Continental shares and a 7% voting interest in the airline. Continental's repurchase of Northwest's interest is part of a recapitalization under which each of Continental's outstanding Class A shares will be reclassified into 1.32 shares of Class B common stock.

Under a newly amended alliance agreement extended through 2025, Houston-based Continental will also issue to Northwest a special series of preferred stock. That means that until the agreement expires, any other major airline that wants to merge or acquire control of Continental must gain Northwest's consent to do so.

The increasing possibility that Northwest will divest its controlling stake in Continental has renewed speculation in recent days that both mid-sized carriers could be taken over by larger airlines -- particularly if the proposed merger of

UAL's

(UAL) - Get Report

United Airlines, the world's largest carrier, and

US Airways

(U) - Get Report

, the nations No. 6 airline, is approved.

A study released last week by the

Economic Strategy Institute of Washington

claimed consolidation of the nation's top carriers would increase competition and air traffic. The study considered the results should the United-US Airways merger receive regulatory approval, and theorized that world's No. 2 airlines American Airlines, owned by

AMR

(AMR)

, would merge with Northwest while

Delta

(DAL) - Get Report

would merge with Continental.

PaineWebber

analyst Sam Buttrick cited takeover speculation as the reason behind the outperformance of Northwest, Continental and US Airways shares compared to the airline group in general over the past two weeks.

US Airways shares had climbed about 10% over the past week to trade in the upper-$30s. US Airways closed Monday regular trading up 44 cents or 1%, at $38.25.

Investors had a mixed reaction to news of the tentative agreement between Northwest and Continental. Northwest finished Monday regular trading flat at $28.13. Continental ended down $3, or 6%, at $49. Continental shares had been trading just below the 52-week high of $54.81 in recent days.

Continental and Northwest expect to sign a definitive agreement within a week, and close the related transactions within the following two months, subject to the settlement of the antitrust case and approval of the boards of both airlines.

"Putting this divisive issue behind us will allow both parties to focus their energies on an alliance that benefits consumers, shareholders and our employees for many years to come," said Gordon Bethune, Continental's chairman and chief executive, in a statement.

Northwest President and Chief Executive John Dasburg said the deal should help preserve the alliance between the two carriers and insure the independence of Continental. "The issues that bring Northwest and Continental together are far stronger and more compelling than those that divided us on this issue," said Dasburg, in a statement.

The Justice Department's antitrust division filed an antitrust suit against both carriers in the fall of 1998, claiming Northwest's new 55% stake in Continental had the potential to hurt competition in the various markets in which the two carriers directly competed.