The full fax
November 15, 2006
VIA FACSIMILE
Mr. Gerald Grinstein
Chief Executive Officer
Delta Air Lines, Inc.
Atlanta, GA 30320-6001
Dear Jerry:
Last Spring we had a conversation about a potential merger of US
Airways and Delta. As you know, following that conversation, I sent you
a letter on September 29, 2006, outlining our thoughts about a
transaction, describing the significant benefits that could be achieved
for both of our respective stakeholder groups from this type of
transaction, and proposing to meet with you and your team to work together
to further consider and develop our proposal. I was disappointed that you
declined to meet or even enter into discussions in your letter of
October 17, 2006. Because the benefits of a merger of US Airways and
Delta are so compelling to both of our companies' stakeholders, we believe
it is important to inform them about our proposal. Therefore, we are
simultaneously releasing this letter to the public.
The Board of Directors and management team of US Airways believe that
a combination of Delta and US Airways presents a significantly greater
value for Delta's creditors, customers, employees and partners than a plan
to emerge from bankruptcy on a standalone basis. We also believe that,
unless we act quickly to pursue a combination through the actions that can
be taken during Delta's bankruptcy process, our respective stakeholders
will not be able to realize what we believe are substantial economic
benefits from such a combination.
Merger Proposal. We propose a merger of Delta and US Airways in a
transaction in which Delta prepetition unsecured creditors would receive
$4.0 billion in cash plus 78.5 million shares of US Airways' common stock.
Based upon the closing price of US Airways' common stock of $50.93 on
November 14, 2006, the equity component represents a value of
approximately $4.0 billion. As a result of this transaction, immediately
following the merger, Delta unsecured creditors would own approximately
45 percent of the combined company.
This proposal represents an aggregate of approximately $8.0 billion in
value to Delta's prepetition unsecured creditors, before taking into
account realization of any of the significant additional value from the
synergies we believe are achievable. Even prior to the realization of any
synergy value, this proposal represents a 25 percent premium over the
current trading price of Delta's prepetition unsecured claims as of
November 14, 2006 (40 cents/dollar), assuming that there will ultimately
be $16.0 billion of unsecured claims. The proposal also represents a
40 percent premium over the average trading price for Delta unsecured
claims over the last thirty days. We believe that this proposal, which is
based on publicly available information, fully values Delta.
Synergy Value. What makes this proposal most compelling for both
Delta creditors and US Airways shareholders are the significant synergies
that we believe can be readily achieved in this proposed transaction. We
have preliminarily identified annual network and cost synergies in excess
of $1.65 billion, which at a median industry EBITDAR multiple of
5.0x translates into approximately $8.3 billion of additional value
creation. This is value that neither of our teams, no matter how well
managed, could create independently. Under the combination, these
synergies would be shared by Delta creditors and US Airways shareholders
in proportion to their initial ownership in the combined company.
The synergies would be generated only through an appropriately timed
transaction, and under our current analysis we believe would be as
follows:
* Approximately $710 million would be realized through expense
reductions. The largest savings would be in consolidation of
information systems, reduction of overhead and consolidation of
facilities. Additional savings are expected through lower distribution
costs and renegotiation of our collective contracts with vendors.
Based upon our experience and synergies achieved with the merger of
US Airways and America West, we believe this estimate is conservative.
* Another $935 million would be realized through network rationalization
synergies. Network rationalization savings would be generated by
managing the combined networks to ensure that the combined fleet size
is better matched to passenger demand. Network synergies would also
arise from better serving our current customers, and by increasing our
competitive presence, attracting new customers and corporate accounts
in markets where neither carrier today is a significant competitor.
In our US Airways/America West merger, we preliminarily identified
approximately $250 million in potential annual cost synergies that we
believed could be realized in that transaction. After having successfully
completed that transaction over a year ago, we have now identified over
$300 million in cost synergies, outperforming our expectations.
Year-to-date, US Airways' RASM is up 17.1 percent versus the industry
being up 9.1 percent, which translates into $425 million in network
synergies already this year. Accordingly, we have a high level of
confidence that we can achieve at a minimum the synergies that we have
identified in a potential Delta / US Airways merger.
Our analysis presumes that a merger would proceed in the same fashion
as the US Airways / America West transaction, with the closing in
conjunction with Delta's emergence from bankruptcy. As I have previously
indicated to you, if we model a merger of our companies after Delta
emerges from bankruptcy standalone, our synergy estimates are cut in half.
We do not believe that simply allowing that potential value to evaporate
is in the best interests of any constituency.
Financing and Structure. We have obtained a financing commitment from
Citigroup to provide $7.2 billion in new financing for this transaction.
This funding would be utilized to refinance Delta's debtor-in-possession
credit facility, refinance US Airways' existing senior secured facility
with GE Capital, and provide the funding for the $4.0 billion cash portion
of our offer. All other allowed secured debt and administrative claims
would be assumed or paid in full.
Preliminarily, we would intend to follow the model used successfully
in the US Airways/America West merger for this transaction. We would, of
course, seek to structure the transaction in a tax efficient manner for
our respective stakeholders, maximizing Delta's net operating loss
carryforwards.
Integration. Our proposal contemplates the creation of the leading
global airline operating under the "Delta" name and brand. To streamline
our operations and capitalize on potential synergies, we would expect to
develop together an integration plan, and identify areas in which
efficiencies can be maximized, including appropriate rationalization of
operational centers.
Regulatory Matters. We have worked with antitrust counsel to analyze
this transaction and believe that any antitrust issues can be resolved.
Labor Matters. We believe that this transaction is in the best
interests of the employees of US Airways and Delta because of the strength
and stability of the company that the transaction will produce. Also, we
expect that we would move to the highest of the existing labor costs in
every group. Because the wage rates for Delta and US Airways employees
are not markedly different, we do not anticipate that this action will
have a material negative impact, and that fact has been included in our
analysis. Similar to the US Airways / America West merger in which there
were no furloughs of mainline operating group employees, our current model
does not assume furloughs of employees in the mainline operating groups.
Conditions. Our proposal is conditioned on satisfactory completion of
a due diligence investigation, which we believe can be completed
expeditiously. In addition, the proposed transaction would be conditioned
on the bankruptcy court's approval of a mutually agreeable plan of
reorganization that would be predicated upon the merger, regulatory
approvals and approval of the shareholders of US Airways. Given our
analysis to date, we are confident that our joint efforts would result in
satisfaction of these conditions and a successful combination of our
companies in a timely manner.
cont.....
