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Air France to buy rival KLM
LONDON, England (CNN) -- Air France has agreed to buy rival Dutch airline KLM for 784 million euros ($900 million) in stock, creating the world's third-largest airline. A final deal is expected to be signed on October 15, both companies said in a joint statement Tuesday. Italian carrier Alitalia also said it has agreed with Air France to start talks immediately with a view to joining the tie-up. "KLM has been pointing out the need for consolidation in light of the challenges facing our industry, and we have not made it a secret we are looking for a stronger European partner," KLM Chief Executive Leo van Wijk said. Air France Chief Executive Jean-Cyril Spinetta said: "This (deal) will bring significant benefits to customers, shareholders and employees." The airline industry expects to lose about $10 billion this year as global travel continues to feel the pressure of an economic slowdown. Many economies have dipped into recession over the past two years. The September 11 terror attacks, SARS, the war in Iraq and competition from low-cost carriers have added to the airline industry's woes. A combination of Air France and KLM catapults the new group above British Airways to take the mantle of Europe's biggest airline. The deal also creates the world's third-largest airline behind AMR's American Airlines and Delta Air Lines. The deal would be the first cross-border airline merger in Europe and paves the way for other airlines to combine. KLM and British Airways tried twice to find a merger formula but walked away in the face of complex regulatory problems. "The airline industry is fragmented and its current competitive structure, with national carriers for each individual country, is an inheritance from a former era,'' Air France and KLM said in their statement. "This has contributed to low profitability and lack of value creation for shareholders.'' Under the terms of the agreement, Air France will offer 11 shares and other securities for every 10 shares of KLM. The offer price of 16.74 euros a share represents a premium of 40 percent over KLM's closing price on Monday. The French government's stake in the new combined group, to be called Air France-KLM, will be reduced to 44 percent from 54 percent. Air France shareholders would own 37 percent of the new group, while KLM shareholders will hold 19 percent. KLM shares soared 18.2 percent to 14.15 euros in early trading in Amsterdam, while Air France dropped 2.5 percent to 13.35 euros in Paris and Alitalia gained 3 percent to 0.298 euros in Milan. The combined group would generate revenue of 19.2 billion euros a year, serve 226 destinations worldwide, operate a fleet of about 540 aircraft and employ about 106,000 people. Both airlines will retain their own brands but Spinetta told a news conference on Tuesday that the new group expects cost saving of about 600 million euros a year.
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