Alaska Air Group Inc. said it would buy Virgin AmericaInc. for $2.6 billion in cash to become the top carrier on the US West Coast and compete more effectively with larger airlines.
At $57 a share, the deal represents a premium of about 86 per cent from Virgin America’s stock price before reports in March that the company was considering a sale. Analysts characterised the price as steep but said the merger would strengthen Alaska Air.
“The perception is that they paid a very, very high price,” said Sterne Agee CRT analyst Adam Hackel.
However, he said Alaska Air could handle the cost because its strong balance sheet would allow it to raise capital at a low borrowing rate.
The merger would help Alaska Air compete against Delta Air Lines Inc. and American Airlines Group Inc., which have embarked on major expansions in Los Angeles, Hackel added.
The perception is that they paid a very, very high price
The deal appears to end what Alaska Air chief executive officer Brad Tilden called a “hard-fought competition” to purchase the offshoot of billionaire Richard Branson’s London-based Virgin Group, which had become famous for its mood lighting and media-rich entertainment on flights.
JetBlue Airways Corp. had also made an offer but said in a statement that the price reached a point where it decided to withdraw from the bidding.
The Alaska Air deal would create the fifth-largest US airline after a decade of mergers that have shrunk the industry to a handful of companies. The top four control more than 80 per cent of the US travel market.
Virgin America accounts for about 1.5 per cent of US domestic flight capacity, while Alaska Air and its Horizon Air subsidiary account for five per cent, Deutsche Bank analyst Michael Linenberg wrote in a recent research note.
Branson, whose holding company owned 24.9 per cent of the airline as of March 25, expressed sadness that Virgin America was changing hands.
Alaska Air said it might keep using the Virgin America brand in some form. It said the deal would generate $225 million in annual synergies once the companies are fully merged. It expects one-time integration costs of $300 million to $350 million.
Alaska Air said it was buying California-based Virgin America to expand in Los Angeles and San Francisco and offer more connections to international airline partners.