The afternoon deal: UAL-Continental ripples

Passengers are reflected in the mirror of the departure terminal as they board an aircraft to fly in the northern part of Cyprus, April 19, 2010. REUTERS/Murad Sezer The UAL-Continental merger will, no doubt, have a big impact on the two companies involved, but will the merger affect the industry, airline share prices or the experience of travelers? That’s up for debate. Here are some facts and opinions on the deal:

Factbox: Continental, United plane orders worth $22 billionReuters

Factbox: The new United AirlinesReuters

Timeline: United/Continental would create largest airlineReuters

Continental Name Change: So Long, Proud BirdWSJ

Then There Were ThreeThe Huffington Post
“Will it help the industry overcome a trail of losses dating back to the Reagan era? I doubt it. Why? Because airline deregulation was based on a flawed premise, and mergers don’t change conditions enough to remove the fallacy.”

What Sealed Continental-United Deal? JealousyWSJ

The Ups and Downs of United-Continental for TravelersWSJ
“What’s really in the United-Continental merger for travelers? Potential short-term pain, and potential long-term gain.”

Continental-United’s Jerry Maguire Moment - WSJ
“At times the call sounded like a love scene straight out of Jerry Maguire: ‘Our networks complete each other,’ said United CEO Glenn Tilton.”

Latest Airline Marriage Probably Won’t Be The Last - Forbes
“With industry costs rising, the deal between Continental and United probably won’t be the end of consolidation in the skies.”

TWA, Pan Am, Eastern… and now Continental

As long expected, UAL is buying Continental Airlines for about $3.17 billion in stock, forming the world’s largest carrier and further shrinking the U.S. airline industry. It’s the biggest deal in the market since Delta’s 2008 purchase of Northwest, and retires another storied brand from the days when air travel was as much about glamor as it was about getting somewhere. The combined company will have 10 hubs, with Houston as its largest, and a workforce of nearly 90,000.

Continental Chief Executive Jeff Smisek will run the Chicago-based combined airline, but the brand will be UAL. The deal is expected to produce $1 billion to $1.2 billion in annual revenue and cost benefits for the combined company by 2013. One-time costs of about $1.2 billion are expected over a three-year period.

The companies expect to complete the transaction in the fourth quarter of 2010.

John Crawley reported late last week that while the deal should pass regulatory muster, the carriers should not expect a Justice Department review to be as swift Northwest’s, which was deliberately timed to be considered by the business-friendly Bush administration.

from Commentaries:

Debt albatross tails Conti Schaeffler

FRANCE-PROTESTS/    The war between Continental and Schaeffler rumbles on. Karl-Thomas Neumann has got board assent for the capital increase he wants to pay down Continental's heavy debts, a hard-fought for move that is likely to dilute the company's largest shareholder Schaeffler.
    But it is only a partial victory for the chief executive of the German auto parts group -- and one that may yet turn out to be Pyrrhic. Neumann may yet be ejected from Conti for resisting Maria-Elisabeth Schaeffler and her right-hand man Juergen Geissinger (CEO of the privately-owned ball-bearing maker).
    Schaeffler has already seen off several former Conti bosses -- Manfred Wennemer left in August last year and CFO Alan Hippe has since quit. If it succeeds in pushing out Neumann and replacing him with its own candidate, Elmar Degenhart -- at a meeting scheduled for August 12 -- Schaeffler will then certainly push ahead with the sale of Conti's well-known rubber business as a way of reducing its 11 billion euro debt.
    Conti and Schaeffler have been deadlocked since the private group took a majority stake last year after an acrimonious takeover battle. Schaeffler's ability to exercise control is constrained by its own heavy borrowings, much of which are against Conti stock which has lost two-thirds of its value.
    Meanwhile, Conti is also labouring under massive borrowings, which its banks would like it to reduce. Both groups are at odds over how to reconcile their differing interests. Schaeffler, which has entered into a standstill agreement which prevents it from taking over Conti till 2012, does not want the target to issue more equity because it doesn't have the cash to follow its money. Nor does it want to merge with Conti because it fears the exchange ratio would be disadvantageous.
    What it would like is for Conti to sell assets to reduce its debt -- even though this is hardly an ideal moment to do this. Shares in Michelin <MICP.PA> are trading at less than half their mid-2007 peak, while Bridgestone <5108.T> shares are at just over half their level in May 2006 and Pirelli <PECI.MI> shares are less than a quarter of their peak.
    Neumann wanted Conti to raise 1.5 billion euros in fresh equity and then to merge with Schaeffler. The board has now consented to the first of these moves. However it remains to be seen if the banks will be queuing up to underwrite the issue, especially as Conti seems keen to issue it at a very narrow discount to the market price.
    If Conti goes ahead, and neither Schaeffler nor its allies follow their money, Schaeffler's direct stake could fall to 35 percent from 49.9 percent and its total stake (including shares held by its banks) to 63 percent from nearly 90 percent.
    What seems clear is that the key players in this deadlock are the banks to both companies. They may themselves have differing interests. Conti's bankers may not be keen on a change of management at the company, especially given the rapid changes which have already taken place at the top. And Schaeffler's bankers might not welcome capital increases at Conti that diluted their equity position.
    Debt has become an albatross around the necks of both companies, which only the banks are able to remove.

from Commentaries:

Conti should turn tables on Schaeffler


Porsche isn’t the only family-controlled German company that has got itself into a complete pickle bidding for a far larger rival.

    Indeed, if you want a test case of how ambition can land a company in serious financial difficulties, look no further than Schaeffler, a privately-owned ball bearings maker which has
seriously overextended itself following a bid for listed car parts maker Continental last year.

    Despite snapping up 90 percent of Conti’s stock, Schaeffler could easily lose control of its intended prey and may end up being swallowed by it.

    Following the bid battle, Schaeffler holds a 49.9 percent direct stake in Conti. A further 39.36 percent is held by Schaeffler's banks -- Sal Oppenheim and Metzler -- in a sort of warehousing deal to reflect the fact that Schaeffler does not actually have the money to buy the whole of Conti. Schaeffler has signed an agreement that it will not increase its stake above the current level prior to August 2012.

Lehman’s long march

Staff member displays Chinese yuan notes to media at currency exchange booth at Songshan airport in TaipeiAsia’s sovereign wealth funds may be loaded, but they don’t need long memories to recall the big losses they’ve suffered on seemingly sure-thing investments in Wall Street’s troubled banks. So with reports that Lehman Brothers came up empty in efforts to win funds from top Chinese brokerage CITIC Securities and state-owned Korea Development Bank, it’s anybody’s guess where it will come up with the cash it needs to deal with an expected $4 billion in writedowns before announcing results in September.  

The path most traveled heads further east, to Singapore and the gulf, where investors could be equally, if not more gun-shy given the news flow. A ray of hope could shine from Singapore though. State investment firm Temasek said it was prepared to plunk more money into Western banks. An Singapore sling couldn’t come at a better time. This morning, Citi’s Prashant Bhatia became the latest big bank analyst to warn on Lehman and fellow investment banks Goldman and Morgan Stanley, lowering third quarter estimates for all three, and The Wall Street Journal says the Fed had called Credit Suisse last month to see if it had pulled a credit line from Lehman, acting to prevent a repeat of the cascading speculation that helped sink Bear Stearns.

U.S. private equity investor Lone Star is buying the rump of lender IKB, Germany’s most prominent casualty of the subprime crisis. The sale by state bank KfW closes an embarrassing and costly chapter for Europe’s biggest economy. IKB nearly collapsed a year ago under the weight of $24 billion in investments linked to risky U.S. home loans, making it Europe’s first major victim of the global financial crisis. The government brokered the first of three rescues to avert what the country’s banking watchdog warned could trigger Germany’s biggest financial crisis since the 1930s depression. But as the cost of the rescues spiraled towards 10 billion euros ($14.8 billion), Berlin started looking for a buyer.

Merrill cleans house

Michael BloombergIt looks like Merrill Lynch has made up its mind regarding its house-cleaning priorities. The investment bank is expected to announce on Thursday that it will sell its 20 percent stake in Bloomberg LP back to the news and financial data company for about $4.5 billion, a source familiar with the matter said. No one on either side is talking, but selling the Bloomberg stake could help Merrill Chief Executive John Thain raise capital to make up for write-downs related in part to subprime mortgages. It is not immediately clear what role, if any, New York Mayor and Bloomberg founder Michael Bloomberg (pictured), who still owns about 70 percent of the company, has played in the Merrill transaction. Merrill also owns a substantial stake in money manager BlackRock Inc, but BlackRock, the largest publicly traded asset management company in the United States, said on Thursday that Merrill had decided against selling the stake. Merrill reports earnings later in the day.

Shares in Teva Pharmaceutical Industries fell nearly 1 percent on Thursday after reports it was in talks to buy rival Barr Phamaceuticals for up to $7.5 billion. TheMarker and Globes financial newspapers reported online overnight that Israel-based Teva, the world’s biggest maker of generic drugs, was in talks to buy New Jersey-based Barr in what would be a further consolidation of the generic drugs industry. TheMarker put the price tag at $7.5 billion, citing capital market sources. That would make it Teva’s biggest acquisition, surpassing the $7.4 billion purchase of Ivax two years ago. Globes cited a price of $7 billion to $7.5 billion. Barr has a market value of $5.1 billion.

And it’s starting to get ugly in Europe. Continental Chief Executive Manfred Wennemer withdrew from the public eye on Thursday to plot his defense against an unwanted $18 billion bid from family-owned Schaeffler Group. If Schaeffler succeeds in buying the group, which is three times its size, it would be the first time a German family business has taken over a company listed on the country’s blue-chip DAX index. But Schaeffler’s advances have stirred resentment at Continental’s headquarters in Hanover, sparking a war of words between both sides. On Wednesday, Continental’s Wennemer hit back at the offer, saying it was too low and warning that the predator could ultimately dismantle Continental. Schaeffler, owned by German billionaire Maria-Elisabeth Schaeffler, countered it had no such plans, labeling Wennemer’s tone “incomprehensible”.

A-courtin’ we will go

Wedding ornamentLike a bad soap opera, the Internet storyline is getting more and more convoluted. The tale so far: Microsoft Corp, spurned by Yahoo Inc, is courting Time Warner Inc to allow a union with Internet division AOL. But Yahoo, which turned its back on Microsoft’s $47.5 billion bid, also wants AOL’s hand. These talks have taken on a new urgency ahead of Yahoo’s Aug. 1 shareholders meeting, a source familiar with discussions told Reuters on Tuesday. How either marriage will work is not immediately clear, but any combination will likely redraw the landscape for advertising on the Internet. So why is AOL so attractive? Both Yahoo and Microsoft view it as beneficial to leverage their positions in the Internet marketplace, where search giant Google Inc dominates. Stay tuned.

But good soaps are not only made in America. It seems the Germans are good at them, too. Tires-to-brakes maker Continental rejected Schaeffler Group’s surprise 11.2 billion euro ($17.8 billion) bid, saying only the family owned firm stood to gain from the offer which was too low. Late on Tuesday, the ball-bearing maker announced the terms of its proposed takeover after winning control of more than a third of Continental’s shares through a web of options organized for it discretely by banks. Schaeffler’s bearings are found in London’s landmark Ferris wheel, the London Eye and it also makes high-precision bearing supports for the U.S. space shuttle and the European launch vehicle Ariane, not that that has any bearing on a deal.

Some suitors, however, do get lucky. Mining company Cleveland-Cliffs Inc said on Wednesday it would acquire Alpha Natural Resources Inc for about $10 billion in cash and stock to expand its coal assets. Stockholders of Alpha, an Appalachian coal producer, will receive 0.95 of a Cleveland-Cliffs common share and $22.23 in cash for each of their common shares when the union is completed. Based on closing stock prices on Tuesday, the deal values Alpha at $128.12 per share, a premium of 35 percent, the companies said in a statement. The combined company will be renamed Cliffs Natural Resources and will include nine iron ore facilities and more than 60 coal mines located across North America, South America and Australia.