Consolidation: United Airlines (UAUA) Builds Muscle with Continental (CAL) Acquisition

Chicago, IL-based United Airlines (UAUA) just expanded to become the largest airline in existence by acquiring Houston, TX-based Continental Airlines (CAL) in an all-stock deal worth $3.15 billion.

Prior to the deal, United Airlines possessed a fleet of 652 planes, 230 destinations and 3,300 departures operated by over 46,000 employees. Following the close of the deal in the fourth quarter of this year, United Airlines will grow to 1253 planes, over 400 destinations and 85,000 employees.

THE TRADE: Generally, the acquirer in a deal (i.e. in this case, United) sees a short-term to medium-term dip in their stock price since they are spending the capital to purchase another company (i.e. Continental). The acquired company sees a short-term lift in their stock price (in this case, CAL stock was purchased at a 1.5% premium to Friday’s closing price). On a long-term horizon, the expectation for the acquirer is to streamline costs and improve efficiency. The UAUA-CAL deal is expected to generate $1 billion to $1.2 billion in revenue and cost benefits by 2013. The downside to the deal is more people will be laid off during the consolidation of the two airlines, not a good sign for the already unhealthy U.S. unemployment rate.

Continental Airlines CEO Jeff Smisek will take the helm as CEO of the newly created United Airlines post-merger. Smisek said, “Both carriers are performing better than they have been for the past couple of years.”

We shall see if anti-trust regulators and shareholders approve the deal soon . Stay tuned…

Disclosure: No positions in the companies mentioned.

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