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Continental to Buy Back Rival's Stake

Airlines: The deal to acquire Northwest's controlling interest will help settle antitrust suit.


Northwest Airlines Corp., striking a deal that U.S. regulators called "a victory for consumers," agreed Monday to sell back its controlling stake in Continental Airlines Inc. to Continental to settle an antitrust suit pending against the carriers.

Northwest bought a 14% equity interest in Continental two years ago as part of a far-reaching alliance between the airlines, but the stake also carried super-voting rights that gave Northwest 55% voting control at Continental. Some analysts dubbed the arrangement a "synthetic merger."

Although Northwest agreed to limit its power to exercise control over Continental for the next decade, the Justice Department sued on grounds that Northwest's large voting-rights stake would inhibit Continental from "vigorously" competing with Northwest in terms of fares and service, thus harming travelers on the airlines' routes.

The antitrust case was complicated by the fact that Continental later decided it didn't want Northwest as its controlling investor, in good part because it believed Northwest's presence helped prevent Continental's stock price from going higher.

The carriers' agreement came a week after the antitrust trial had started. Their willingness to avoid additional litigation underlines the impact of the Justice Department's much tougher approach to airline marriages.

Indeed, the agency's hard-line stance on the Northwest-Continental deal is heightening speculation that plans by UAL Corp.'s United Airlines to buy US Airways Group Inc. are in serious danger of being blocked by the Justice Department as well.

"No matter how you cut it, this is a victory for the government," said Kevin Mitchell, chairman of the Business Travel Coalition, an advocacy group. The deal between Northwest and Continental, the nation's fourth- and fifth-largest airlines, respectively, is "a victory for consumers, who will benefit from lower fares and better airline service," A. Douglas Melamed, acting assistant U.S. attorney general in charge of the Justice Department's antitrust unit, said in a statement.

The rest of their alliance, under which they help feed passengers to each other's route systems, remains in place. Northwest is based in Eagan, Minn., and Continental is headquartered in Houston.

Continental has two classes of common stock: Class A shares with super-voting rights that are mostly owned by Northwest, and the more widely traded Class B shares that carry one vote apiece.

Under the agreement, Continental would buy back most of Northwest's 6.69 million Class A Continental shares for $450 million, or about $67.25 a share. Then it would convert its remaining Class A stock into Class B shares, which would leave Northwest with Class B shares that represent about a 7% voting interest in Continental, Melamed said.

However, Continental also will issue a special preferred stock to Northwest that would effectively block Continental from merging with another carrier without Northwest's consent.

In response to the deal and the planned stock conversion, Continental's Class A stock soared $11.81 a share Monday to close at $63.69, while the Class B stock fell $3 a share, to $49, both in New York Stock Exchange composite trading. Northwest's stock closed unchanged at $28.13 a share on Nasdaq.

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