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United-Continental Merger Talks Hit Snag Over Price

Andrew Ross Sorkin, Michael J. de la Merced|The New York Times
Sunday, 25 Apr 2010 | 8:58 PM ET

Merger talks between United Airlines and Continental Airlines reached an impasse over the weekend over a disagreement about the price of a stock-for-stock deal, people involved in the negotiations told DealBook.

AP

The chief executives of United and Continental , Glenn F. Tilton and Jeffery A. Smisek, respectively, spoke on Friday and Saturday about the exact ratio of shares that United planned to pay for Continental, these people said. That would affect the price United would ultimately pay for the deal.

More specifically, the two companies have not been able to reach an agreement over the value of the stock prices used to compute the exchange ratio.

One person involved in the discussions described the disagreement as a potential deal-breaker for the talks, though the companies are continuing to negotiate.

Other elements of a potential merger had already been agreed upon, including the naming of Mr. Tilton as chairman and Mr. Smisek as chief executive of the combined airline, which would keep the United name.

The Friday conversation between Mr. Tilton and Mr. Smisek was their first about a stock exchange ratio since the two airlines resumed merger talks more than a week ago.

Stock-for-stock mergers usually rely on share prices from a certain time period to determine how many shares the acquirer would issue to the target.

Both companies have agreed to an “at-market” deal. Continental has insisted on using the “unaffected share prices,” meaning the price of the stock before DealBook reported that United had restarted merger talks with US Airways. But United wants to use a later market price, possibly on the day before a merger with Continental is announced.

The difference is crucial: United’s share price has risen more than 18 percent to $22.99 since April 7, when news of the United-US Airways talks broke. Continental’s has risen just 4.6 percent, closing on Friday at $22.01.

That would mean that under Continental’s methodology, the airline would receive more United shares — meaning a higher price. More specifically, based on a 30-day volume-weighted average price using share prices before April 7, Continental stockholders would receive 1.15 United shares for each of their shares, one of these people said. On a 10-day average, Continental investors would receive about 1.1 United shares for each of their shares.

Under United’s methodology, the exchange ratio would be much lower.

The obstacle could put extra pressure on United and Mr. Tilton, who has been one of the most vocal proponents of greater consolidation within the airline industry. Another potential merger partner, US Airways, announced on Thursday that it had broken off talks with United as talks with Continental appeared to have picked up steam.

Mr. Smisek has said recently that Continental would consider a “defensive” merger, suggesting that the airline would be content to remain independent with a United-US Airways merger now unlikely. (Continental executives were taken by surprise upon learning of the United-US Airways talks, people briefed on the matter previously told DealBook.)

The two sides have approached their latest round of talks with some caution, given their previous efforts to merge. Deal talks in 2008 broke apart over Continental concerns over United’s financial health.

Several industry analysts have said that with US Airways’ exit, the chances of a United-Continental merger have dropped significantly.

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