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Inside look- Southwest Airlines and AirTran Holdings Inc Deal

Southwest Airlines (LUV), the biggest discount airline in the United States, agreed to purchase Orlando, Fla.-based AirTran Holdings Inc (AAI) for about $1.4 billion. The transaction values the discount carrier at $7.69 a share, a 69% premium to its closing price on Friday. The deal calls for each share of AirTran to be exchanged for $3.75 in cash and 0.321 shares of Southwest, subject to certain adjustments.

The board of directors from each company has already voted in favor of the purchase, and is subject to the approval of AirTran shareholders and regulators. Citigroup (C) and Dahlman Rose & Co. acted as financial advisory to Southwest Airlines. Shares of AirTran jumped 64% premarket and Southwest shares slipped less than 1%.

“The acquisition also allows us to expand our presence in key markets, like New York LaGuardia, Boston Logan, and Baltimore/Washington,” Gary Kelley, Southwest’s chief executive, said in a statement.

Morgan Stanley advised AirTran. Sullivan & Cromwell and Smith, Gambrell & Russell served legal advisors. Citigroup  and Dahlman Rose & Company acted as financial advisers to Southwest Airlines. Vinson & Elkins was legal counsel to Southwest Airlines.

In May, United parent UAL Corp (UAUA) announced the acquisition of Continental Airlines (CAL) for $3.17 billion in an all-stock deal.

AirTran’s presence in Atlanta is second only to Delta Air Lines. AirTran has 2,500 employees based in Atlanta. Southwest currently does not fly out of Atlanta.

“Southwest is a growing airline and hiring and they need employees,” Hutchinson said when asked about the effect the merger will have on Atlanta-based workers. “We’ll work through all that as the deal closes.”

Southwest and AirTran said the new airline will operate from more than 100 airports and serve more than 100 million customers.

The deal is worth approximately $3.4 billion including AirTran’s debt. Southwest will pay about $670 million with available cash.

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