By Ari Rabinovitch and Steven Scheer
JERUSALEM (Reuters) - Israel's flag carrier El Al Airlines, forced to slim down following a government bailout during the pandemic, said on Thursday it has entered a non-binding memorandum of understanding to buy smaller local rival Arkia.
Under the proposed deal, Arkia would become a fully-owned subsidiary of El Al. In return, Arkia's shareholders would get a 10%-14% stake in El Al through shares and options, the airline said in a regulatory filing.
Arkia, in its own statement, said the deal stipulates it would continue operating as an independent brand.
"We still have a long way to go before the deal to acquire Arkia is completed, which is part of El Al's strategy to expand into additional areas of activity," said El Al chairman Amikam Ben Zvi.
Any deal would need approval from the government, Israel's competition regulator and the companies' labor unions.
The companies hope to reach a binding agreement 30 days after a month of due diligence. After that they will have up to 150 days to complete the transaction.
El Al in 2018 had sought to buy another small carrier, Israir, but the competition regulator did not allow the merger.
Shares in El Al were up 8.7% to 3.86 shekels in afternoon trading in Tel Aviv.
El Al said in October it had entered talks with Arkia regarding a possible acquisition. Both airlines have been hit hard by the COVID-19 pandemic with Israel's borders largely closed to foreign tourists since March 2020.
In exchange for a government bailout, El Al -- which recently changed ownership and management -- was forced to trim its workforce by one-third, eliminate routes and reduce its all Boeing (NYSE:BA) fleet size to 29 from 45 planes.
Privately owned by the Nakash Group, Arkia has seven aircraft and mainly flies domestic routes and to Europe using Embraer and Airbus aircraft.
El Al has long been interested in flying to the Red Sea resort city of Eilat in southern Israel -- a route controlled by Arkia and Israir.