- The Washington Times - Wednesday, December 13, 2006

Reported talks between Continental and United airlines over a proposed merger may be doomed as the result of an unusual relationship between Continental and a third airline.

Northwest Airlines holds a special preferred “golden share” of Continental Airlines stock, giving Northwest the right to block Continental from consolidating with another airline.

The alliance dates to late 2000 when Northwest agreed to sell shares of Continental common stock back to Continental after the Justice Department accused Northwest of anti-competitive behavior.

As a condition of the sale, a special class of preferred Continental stock was created and sold to Northwest, giving the airline veto power if Continental attempted to merge with another airline.

Northwest declined to say whether it would consider exercising its veto. But airline analyst Anthony Tangorra said the Eagan, Minn., airline wouldn’t hesitate because a Continental-United combination would create the world’s largest carrier, dwarfing Northwest.

“Northwest highly values its right to block the acquisition of Continental Airlines,” said Mr. Tangorra, chief executive of Latitude Transport Advisory of New York.

Sources who confirmed the United-Continental talks asked not to be identified because the discussions are private. United and Continental officially declined to comment on the talks.

Continental still could proceed with an acquisition, despite objections from Northwest, if the deal doesn’t require a vote of Continental stockholders.

Moreover, if Northwest is engaged in a merger of its own, its veto power over Continental would be voided under terms of its 2000 alliance.

“There are a lot of hurdles to this [United-Continental proposal], so it’s anything but a done deal,” said Ray Neidl, an airline analyst with Calyon Securities.

A Continental-United partnership would make sense because United’s strong presence in the Pacific and Western U.S. would complement Continental’s presence in the Latin American and trans-Atlantic markets, analysts say.

Just how serious are Continental and United about merging?

“Continental and United have been talking for years,” Mr. Tangorra said. “As a matter of fact, every airline has been talking to every airline for years. The moment of those talks have an ebb and flow.”

The United-Continental acquisition proposal is one of several for airlines in recent weeks.

US Airways Group Inc. last month proposed an $8 billion takeover of bankrupt Delta Air Lines. Delta has said it has no interest in the offer.

AirTran Holdings Inc. yesterday made a $290 million stock and cash bid for Midwest Air Group Inc., the parent company of Midwest Airlines, an Oak Creek, Wis., carrier with hubs in Milwaukee and Kansas City, Mo.

Australia’s Qantas Airways staved off a recent takeover bid led by an investment bank and two private-equity firms.

United also has been reported to be considering an acquisition of Delta.

“The industry is fragmented and primed for consolidation,” Mr. Neidl said.

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