NEW YORK (Reuters) – Alaska Air Group Inc (N:ALK) said on Monday that it would buyVirgin America Inc (O:VA) for $2.6 billion to compete more effectively with larger airlines and become the top carrier on the U.S. West Coast.
The deal appears to end what Alaska Air Chief Executive Officer Brad Tilden called a “hard-fought competition” to purchase Virgin America. JetBlue Airways Corp (O:JBLU) had also made an offer.
The deal would create the fifth-largest U.S. airline in the latest in a series of mergers in the past decade that have shrunk the industry to a handful of companies. The top four control more than 80 percent of the U.S. travel market.
Alaska Air said it might continue to use the Virgin America brand in some form. The offshoot of billionaire Richard Branson’s London-based Virgin Group has become famous for its mood lighting and media-rich entertainment on flights.
Alaska Air said it was buying the California-based competitor to expand in Los Angeles and San Francisco and offer more connections to international airline partners. It would also benefit from Virgin America’s corporate contracts and cult-like status among travelers that work for technology companies.
The combined company would retain Alaska Air’s Seattle headquarters.
“While California is actually our second-biggest state in terms of flying, we don’t fly east-west out of there,” Tilden told reporters on a conference call Monday, noting the company had been considering an acquisition for a couple years.
“We’ll go from serving one out of the top 10 destinations out of San Francisco to serving all 10.”
Alaska Air said in a statement that 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.
The company would pay $57 per share in cash, about 86 percent above Virgin America’s stock price before reports in March that the airline was considering a sale.
The companies said they expected the deal to receive the necessary approvals from Virgin America shareholders and U.S. regulators by Jan. 1.
Sterne Agee CRT analyst Adam Hackel said the deal would help Alaska Air compete with Delta Air Lines Inc (N:DAL) and American Airlines Group Inc (O:AAL), which have embarked on major expansions in Los Angeles.
At the same time, this competition might help the deal to pass an antitrust review.
Bank of America Merrill Lynch (N:BAC), UBS Investment Bank (S:UBSG) and Cowen & Co (O:COWN) were financial advisers to Alaska Air, while Evercore Group LLC advised Virgin America. Legal advisers were O’Melveny & Myers LLP to Alaska Air and Latham & Watkins LLP to Virgin America.