CAROLE SHIFRIN WASHINGTON DC Northwest Airlines has agreed to sell back its controlling stake in Continental Airlines to settle a US antitrust suit that was already on trial in Detroit.

The proposed settlement, reached after the first two days of testimony in US District Court in Detroit, is expected to be approved by boards of both airlines, the Department of Justice (DoJ) and US District Judge Denise Page Hood, who had presided over the start of the trial.

"This is the result we have sought all along," said Acting Assistant Attorney General Douglas Melamed, in charge of the antitrust division. "It will ensure that Northwest and Continental remain independent competitors."

The department had filed suit in 1998 challenging Northwest's acquisition of control of Continental, alleging it would eliminate actual and potential competition between them. Northwest acquired the share holding from Air Partners, the group led by entrepreneur David Bonderman that brought Continental out of bankruptcy in 1993 and had seen its investment appreciate.

The Class A shares acquired by Northwest represented 14% of Continental's common stock equity, but gave Continental more than 51% of the voting power because of their "super voting rights". Although Northwest's ability to vote its stock was restricted by a "voting trust" and other constraints over a 10-year period, the DoJ contended the measures would not prevent the harm likely from the acquisition.

At first Continental welcomed Northwest's investment, but as the financial table turned, chairman Gordon Bethune had become increasingly vocal about the desire to regain the stock and assure the airline's future independence. Continental was in the unusual position of being a defendant in the US case, but perhaps rooted for the prosecution to prevail.

The case against Northwest, the fourth largest airline in the USA, and Continental, the fifth largest, was being watched closely for clues as to the DoJ's leaning on an even bigger acquisition - the proposed takeover by United Airlines of US Airways, the nation's largest and sixth largest carriers respectively.

Under the proposed Detroit settlement, Northwest agreed to sell about 6.69 million Continental Class A shares back to Continental for $450 million. The transaction will be part of a recapitalisation of Continental, under which each outstanding share of Class A common will be reclassified into 1.32 shares of Continental Class B common.

As a result, Northwest's remaining Class A shares will be converted into about 2.6 million Class B shares, giving it a 5% equity stake in Continental. It will have a 7% voting interest, but can vote its shares only in proportion to all other shareholders' votes.

The agreement between the carriers also extends the marketing agreement between Northwest and Continental through 2025 and gives Northwest veto power over a Continental merger with any other major airline during that period.

Source: Airline Business