Midwest to go private
AirTran spurned; investors, including Northwest, make $16-a-share bid
By TOM DAYKIN
[email protected]
Posted: Aug. 12, 2007
A group of investors, including Northwest Airlines Corp., is offering to buy Midwest Air Group Inc. for $16 a share, a maneuver that shoots down a competing offer from AirTran Holdings Inc. but raises the specter of a possible antitrust challenge by federal authorities.
The investors group - led by TPG Capital, of Fort Worth, Texas - would convert Midwest Air to a privately held company, according to a statement issued late Sunday.
That would accomplish Midwest Air Chairman and Chief Executive Officer Timothy Hoeksema's goal of maintaining Midwest Airlines and Midwest Connect as stand-alone, regional airlines - keeping them out of the hands of Orlando, Fla.-based AirTran, a rapidly growing airline that harbored ambitious plans of making Milwaukee its second hub.
TPG Capital also would sweeten the deal for Midwest Air's shareholders, who were offered $15.75 a share by AirTran - a last-minute increase by the airline. TPG Capital would pay cash, which likely holds more appeal for shareholders than AirTran's cash and stock offer.
For Northwest, the investment would help prevent AirTran from developing a hub in Milwaukee - which could threaten to siphon away travelers who fly to Northwest's hubs in Minneapolis, Detroit and Memphis.
Midwest Air and TPG Capital don't yet have a definitive sale agreement, but one is expected by Wednesday, said Carol Skornicka, Midwest Air's senior vice president of corporate affairs.
Also, the sale will need approval from the U.S. Department of Justice, which routinely reviews airline mergers for possible antitrust violations.
Midwest Air controls about 50% of the market at Milwaukee's Mitchell International Airport. Eagan, Minn.-based Northwest, the No. 2 carrier at Mitchell, has about 19% of the market.
About 30 minutes before Midwest Air's announcement, AirTran said it would not renew its tender offer, which it had boosted to $15.75 a share, and was withdrawing from negotiations. That offer consisted of $9.50 in cash - up from $9 in cash - and 0.5842 shares of AirTran common stock for each Midwest share.
Nearly 63% of Midwest Air's shares had been tendered to AirTran under its tender offer, which expired at midnight Friday.
AirTran's statement blasted Midwest Air's board for ignoring what AirTran Chairman and CEO Joe Leonard called "the overwhelming majority of shareholders' wishes."
Leonard said AirTran's purchase of Midwest Air would have resulted in increases in air travel from Mitchell, as well as a surge in local hiring.
"Instead, the Midwest board has chosen a path that will benefit current senior management by selling out to a private equity firm and a so- called 'passive' investor whose involvement will surely raise antitrust concerns, casting doubt for shareholders on whether a transaction can, in fact, close," Leonard said, referring to Northwest.
"Furthermore, private equity investors are laser focused on generating short-term returns and the only way to accomplish that goal is to slash costs by cutting back on service and eliminating jobs," Leonard said. "If the Midwest board is successful in selling the company to a private equity investor, the Midwest employees should be concerned about their job security and Midwest's customer service is sure to suffer."
'Intent is to grow'
But TPG Capital is not looking to cut service or employment, said Capt. Jay Schnedorf, head of the pilots union at Midwest Airlines.
"Their intent is to grow Midwest Airlines," Schnedorf said. He said TPG Capital's resources would allow Midwest Air to have more growth opportunities.
That view was echoed by Scott Hamilton, who operates Leeham Co., an airline industry consulting firm in Issaquah, Wash.
"TPG is not interested in shrinking. TPG is interested in growing," Hamilton said. He noted the firm's previous airline industry investments, including stakes in Continental Airlines and America West Airlines that helped both companies emerge from Chapter 11 bankruptcy.
The level of Northwest's involvement in TPG Capital's bid will likely determine whether it gains approval from federal antitrust regulators, Hamilton said.
Northwest issued a statement Sunday night confirming that it's an investor in the bid. That statement did not discuss the level of Northwest's investment, but it did say Northwest "will not participate in management or control of Midwest should TPG acquire Midwest."
TPG Capital's $16 a share offer is a 12.4% premium to Midwest Air's Friday closing price of $14.23 a share. Midwest Air's price was $9.08 a share on Dec. 12, the day before AirTran announced its interest in the company.
AirTran's plans for Midwest Air revolved around ditching the airline's signature wide seats and greatly expanding service.
The wide, two-across seating, used in most Midwest Airlines jets, would have been substantially reduced. Those jets would have been converted to the traditional divided passenger cabin - mainly offering a two-by-three seating configuration.
By fitting more passengers into narrower seats, and by slashing fares, AirTran planned to add a lot more departures from Mitchell International. That included flights to new non-stop destinations.
AirTran said it eventually would add 74 daily departures from Mitchell, and 27 destinations. The combined Midwest Airlines and Midwest Connect operations offer about 140 daily departures from Mitchell to just over 40 cities.
That increased business would create about 1,100 jobs in the Milwaukee area, Leonard said. Midwest Air has about 2,900 employees in Wisconsin, primarily at Mitchell and the company's headquarters in Oak Creek.
Hoeksema raised doubts about whether those expansion plans were sustainable.
Meanwhile, Midwest Air unveiled its own, more modest expansion plans, much of it revolving around a bigger role for Midwest Connect. Hoeksema also announced plans to reduce the number of wide, two-across seats on Midwest Airlines and add more narrow seats - boosting passenger count and revenue for those flights.
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