European carriers Air France and KLM said this morning they agreed the French airline would acquire its smaller Dutch rival to create the world's third-largest airline group.
The €784 million ($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 yesterday 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 after a one-and-a-half year period. The deal values the share capital of KLM at €784 million and represents a 40 per cent premium over KLM's closing share price of September 29th.
Current KLM shareholders would own 19 per cent of the enlarged group, while the French state would see its stake fall to 44 per cent from its current 54 per cent. Air France shareholders would own the remaining 37 per cent.
An 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.
Italian airline Alitalia also said today it had agreed with Air France to start talks immediately with a view to joining its tie-up with KLM.