European carriers Air France and KLM said yesterday they agreed the French airline would acquire its smaller Dutch rival, creating the world's third-largest airline group.
The 784 million euro (US$896 million) deal follows more than a year of alliance talks between Air France and KLM, Europe's second- and fourth-ranked carriers.
The two held board meetings on Monday evening to approve the outlines of the deal -- the first cross-border merger of leading European airlines.
Under the terms of the transaction, Air France would offer 11 of its own shares plus 10 Air France warrants for every 10 KLM shares held.
Three warrants give the right to subscribe to or acquire two Air France shares at an exercise price of 20 euros after a one-and-a-half year period.
The deal values the share capital of KLM at 784 million euros and represents a 40 percent premium over KLM's closing share price of Sept. 29.
Current KLM shareholders would own 19 percent of the enlarged group, while the French state would see its stake fall to 44 percent from its current 54 percent. Air France shareholders would own the remaining 37 percent.
"We have always been convinced of the necessity of consolidation in the airline industry," said Air France Chairman Jean-Cyril Spinetta in a statement.
"Today we announce a combination with KLM that will create the first European airline group, which is a milestone in our industry," he said.
Italian airline Alitalia also said yesterday it had agreed with Air France to start talks immediately with a view to joining its tie-up with KLM.
A successful Air France-KLM combination would create the world's third-largest airline group, behind AMR's American Airlines and Delta Air Lines.
The pairing could also serve as a model for other full-service airlines struggling with an economic slowdown and growing competition from no-frills airlines in an already overcrowded market.
Even many governments, which had once seen the existence of flag carriers as a matter of national pride, now recognize the need for consolidation.
The tie-up would bring KLM into the SkyTeam alliance, led by Air France and Delta Air Lines, and is likely to lure KLM's US partners, Northwest and Continental, later.
This would make SkyTeam bigger than the oneworld alliance of carriers led by British Airways and American Airlines and narrow the gap between SkyTeam and the top-ranked Star Alliance, led by Lufthansa and United Airlines.