Copyright 2000 The Washington Post
The Washington
Post
November 7, 2000, Tuesday, Final Edition
SECTION: FINANCIAL; Pg. E01
LENGTH: 875 words
HEADLINE:
Northwest To Return Its Stake in Continental; Airline Seeks End To Antitrust
Lawsuit
BYLINE: Frank Swoboda , Washington Post Staff
Writer
BODY:
Northwest Airlines Corp.,
seeking to settle a two-year-old Justice Department antitrust suit, agreed
yesterday to sell its controlling financial stake in Continental Airlines Inc.
to that carrier, while retaining veto power over Continental's destiny in any
future consolidation of the nation's airline industry.
The two airlines
announced that Northwest will sell for $ 450 million the 6.9 million controlling
shares of Continental it purchased two years ago as part a marketing alliance
that amounted to a virtual merger of the two airlines. Northwest and Continental
are the nation's fourth- and fifth-largest airlines.
The agreement came
just a week after the start of the antitrust trial in Detroit, in which the
government sought to force Northwest to divest its control of Continental. A.
Douglas Melamed, acting assistant attorney general in charge of the antitrust
division, hailed the agreement yesterday as "a victory for consumers."
"This is the result we have sought all along. It will ensure that
Northwest and Continental remain independent competitors," he added.
The
two airlines, with the backing of the Justice Department, immediately obtained a
one-week delay in the trial to work out the details of the deal. The agreement
is subject to approval by the boards of the two airlines as well as the Justice
Department.
Concerns over future industry consolidation have been
growing among government regulators and on Capitol Hill since the announcement
earlier this year that United Airlines, the nation's largest
air carrier, and US Airways, the sixth-largest, planned to
merge. The merger triggered immediate speculation that if the
United deal went through, Northwest and American Airlines would merge, followed
by Delta Air Lines and Continental--shrinking the industry to three major
airlines.
The key to the consolidation scenario was Northwest's holding
of a controlling interest in Continental, a block of 4.1 million shares of
common stock formerly owned by Texas financier David Bonderman. Although the
Bonderman holdings amounted to only 14 percent of Continental's stock, they
represented 51 percent of Continental's voting rights.
Bonderman, who
had retained the right to buy back his old stock in Continental in the event of
a sale, gave up that right as part of the deal announced yesterday.
Under one consolidation scenario, American would buy Northwest and sell
the Bonderman shares to Delta, which in turn would use them to take over
Continental. Northwest has now agreed to sell the Bonderman shares back to
Continental.
The agreement announced yesterday calls for Continental to
buy back 6.69 million of its Class A shares for $ 450 million. Northwest would
keep 2.6 million shares of Continental's Class B stock.
In addition,
Continental would issue Northwest a special series of preferred stock that would
give Northwest the right to block "certain business combinations" by Continental
during the term of the current marketing alliance between the two companies,
which lasts through 2025.
As translated by both sides yesterday, the
special preferred stock gives Northwest veto power over the sale of all or part
of Continental to another major airline. But Northwest would automatically lose
that veto power if it were to merge with, or sell major assets to, another
airline first.
"If they [Northwest] do a major deal with American, that
frees us up," said a Continental official. "If they agree to merge or combine
with another major carrier, their blocking right goes the moment they sign the
agreement." He added that "for the first time in six years we don't have a
controlling shareholder."
Nonetheless, as long as Northwest remains
independent, that veto power gives it a strong hand in determining future
consolidation in the airline industry.
"In the consolidation game we
still are playing with two hands," said a source close to the agreement
negotiations.
The Justice Department filed the suit in October 1998 to
block Northwest's purchase of the Continental shares. Antitrust officials called
the airlines' marketing alliance anti-competitive and said it "would lead to
higher ticket prices and worse service for the over 4 million passengers
traveling on the routes dominated by the two airlines."
Most major
airlines today have both domestic and global alliances that allow one airline to
sell a ticket under its own name over the routes of another partner carrier--a
practice known in the industry as code sharing. The alliance agreement gives
each carrier a much greater route structure and often makes smaller carriers
competitive with larger airlines.
But the government in its suit argued
that the exchange of stock giving Northwest voting control over Continental was
anti-competitive. It left open the question of whether marketing alliances
themselves were permissible. It said it had some concerns about certain aspects
of the alliance and would continue to investigate the marketing aspects
separately.
The department never did bring action against the alliance,
and officials at both airlines said yesterday that they considered the Justice
Department's silence on the matter an implicit approval. The department did not
comment.
LOAD-DATE: November 07, 2000
