United, Continental 'haggling' over value in proposed merger

UAL Corp.'s United Airlines and Continental Airlines Inc. are at odds over how to value their planned no-premium stock merger, with negotiations focused on what time period to use for the stock-swap ratio, said three people familiar with the situation.

Continental prefers a ratio based on stock prices before April 7 reports that United was in merger talks, said two of the people, who declined to be identified because the discussions are private. United, whose stock has outperformed Continental's since then, is pushing for a later date, they said. United Chief Executive Officer Glenn Tilton and Continental CEO Jeffery Smisek are working on details of an accord after reaching a tentative agreement on some points, the people said. In the plan under discussion, Tilton would become chairman of the combined company and Smisek would be CEO, the people said.

"Both sides probably want to feel like they're doing some sort of haggling," said Vicki Bryan, a debt analyst at New York-based Gimme Credit LLC. "They would benefit almost equally from this merger, and both of them have a lot at risk if this falls through." Continental's shares were worth about 1.08 times United's shares on April 7, and United's rally caused that ratio to slip to about 0.96 before today. UAL will report first-quarter financial results tomorrow morning, which may cause additional changes in the ratio.

Today's TradingContinental rose $1.28, or 5.8 percent, to $23.29 at 12:20 p.m. in New York Stock Exchange composite trading, while UAL slid 87 cents, or 3.8 percent, to $22.12 on the Nasdaq Stock Market. UAL and Continental gained 21 percent and 7.4 percent respectively from April 7 through April 23."The market is taking a look at the stories and thinking that there is a chance that Continental will get more of a premium than previously thought if there is a merger agreement," Jim Corridore, a Standard Poor's equity analyst, said today in an interview. "That would be more costly for United, pushing United down."Corridore, who is based in New York, rates Continental as a "strong buy" and recommends holding shares of UAL.At stake with the ratio negotiations is $200 million or more of market value in the merged company to which each side lays claim. The airlines' combined stock market values were about $6.9 billion as of April 23, and the dispute may amount to 4 percent or more of that total.$23-Per-Share DealBecause the shares of both companies have been trading around $20 to $23 over the past couple weeks, "it looks like the market thinks this is a $23-per-share deal," Bryan said.On April 23, Continental's Smisek and United CEO Tilton spoke to discuss the exchange ratio, said one person briefed on the matter. The executives failed to resolve their differences on that call or on a subsequent one, though they plan to negotiate further, this person said."I don't think either carrier wants to walk away from this deal or let it fall apart over $2 or $3 a share," Bryan said.David Messing, a spokesman for Houston-based Continental, declined to comment as did Jean Medina, a spokeswoman for Chicago-based United.After the end of regular trading on April 7, the New York Times first reported merger talks between United and US Airways Group Inc. Discussions between Continental and UAL began after that, people with knowledge of the conversations have said.US Airways TalksUS Airways called off its negotiations with United last week. The Tempe, Arizona-based carrier halted the discussions because it concluded United favored a Continental tie-up, people close to the talks have said.United and Continental are the third- and fourth-largest U.S. airlines by traffic, and together they would surpass Delta Air Lines Inc., which took the No. 1 spot by buying Northwest Airlines Corp. in 2008. Broader route networks help airlines funnel in more passengers.Blending their route systems would produce two hubs at U.S. East Coast business centers, United's at Washington Dulles and Continental's at Newark, New Jersey. United's routes include flights between Washington and Moscow, a city not served by Continental.