Delta Is Far From Ready
By David Lee Smith
December 26, 2006
You've gotta love it. Just as the world of financial news was slowing last week, a spate of added intrigue surrounding the hostile effort by US Airways (NYSE: LCC) to acquire bankrupt Delta (OTC BB: DALRQ.PK) arrived to supplement the otherwise waning pre-Christmas entertainment. But when all was said and done, it became even clearer that US Airways' effort to acquire its Atlanta-based rival wouldn't be concluded quickly or easily.
Delta's management obviously plans to fight US Airways -- which has submitted an $8.3 billion offer for Delta -- every step of the way. Indeed, Delta's management team, its pilots, and various other groups would like to continue to pursue a restructuring under bankruptcy protection and to morph their airline into what they maintain will become an impressively profitable entity in the coming years. They also believe that Delta is worth far more than what US Airways has offered.
In rejecting the offer, which was tendered last month, Delta submitted its own long-awaited plan to emerge from bankruptcy. According to the plan, Delta is worth between $9.4 billion and $12.2 billion. It also projects profitability for the No. 3 carrier as early as 2007, when it expects net earnings to be about $500 million, before they reach $1.2 billion in 2010. Those figures compare with a $2.2 billion loss last year. The plan also specifies that Delta will cut its debt in half and predicts that the airline's holders of unsecured debt will receive between 63% and 80% of their allowed claims.
After Delta filed the plan, US Airways Chairman and CEO W. Douglas Parker assailed it. "Something here looks a little out of whack," he said of Delta's self-evaluation. Parker pointed out that at its higher ranges, Delta's self-ascribed valuation indicates a worth for the airline that comes close to the value of Southwest (NYSE: LUV), or about as much as United (Nasdaq: UAUA) and AMR's (NYSE: AMR) American combined.
Delta CEO Gerald Grinstein also took the company's argument to the Georgia statehouse, where he argued to state lawmakers that a takeover by US Airways could cause the loss of 10,000 jobs and might result in a company with as much as $23 billion in debt. Grinstein noted that there never has been a hostile takeover of an airline in the U.S. and declared that "it's not about to start here."
In the final analysis, Delta's creditors will be key to the success -- or lack thereof -- of the carrier's efforts to stave off US Airways' overtures and to go it alone. US Airways has offered to pay the unsecured creditors $4 billion in cash and 78.5 million shares of US Airways stock. Last week, a group of 17 creditors who hold $2.25 billion in unsecured claims against Delta urged the company to weigh all of its options and to consider alternatives to its own reorganization plan.
The Delta drama likely will play out over many months. Fools should realize that while the company's share price is up fourfold from its 52-week low, in a bankruptcy restructuring, shareholders of the common stock generally are left out shivering in the cold. I'd therefore urge Fools with an interest in participating in Delta's $1.32 share price to simply recognize the distinct difference between investing and gambling for fun.
For related Foolishness:
By David Lee Smith
December 26, 2006
You've gotta love it. Just as the world of financial news was slowing last week, a spate of added intrigue surrounding the hostile effort by US Airways (NYSE: LCC) to acquire bankrupt Delta (OTC BB: DALRQ.PK) arrived to supplement the otherwise waning pre-Christmas entertainment. But when all was said and done, it became even clearer that US Airways' effort to acquire its Atlanta-based rival wouldn't be concluded quickly or easily.
Delta's management obviously plans to fight US Airways -- which has submitted an $8.3 billion offer for Delta -- every step of the way. Indeed, Delta's management team, its pilots, and various other groups would like to continue to pursue a restructuring under bankruptcy protection and to morph their airline into what they maintain will become an impressively profitable entity in the coming years. They also believe that Delta is worth far more than what US Airways has offered.
In rejecting the offer, which was tendered last month, Delta submitted its own long-awaited plan to emerge from bankruptcy. According to the plan, Delta is worth between $9.4 billion and $12.2 billion. It also projects profitability for the No. 3 carrier as early as 2007, when it expects net earnings to be about $500 million, before they reach $1.2 billion in 2010. Those figures compare with a $2.2 billion loss last year. The plan also specifies that Delta will cut its debt in half and predicts that the airline's holders of unsecured debt will receive between 63% and 80% of their allowed claims.
After Delta filed the plan, US Airways Chairman and CEO W. Douglas Parker assailed it. "Something here looks a little out of whack," he said of Delta's self-evaluation. Parker pointed out that at its higher ranges, Delta's self-ascribed valuation indicates a worth for the airline that comes close to the value of Southwest (NYSE: LUV), or about as much as United (Nasdaq: UAUA) and AMR's (NYSE: AMR) American combined.
Delta CEO Gerald Grinstein also took the company's argument to the Georgia statehouse, where he argued to state lawmakers that a takeover by US Airways could cause the loss of 10,000 jobs and might result in a company with as much as $23 billion in debt. Grinstein noted that there never has been a hostile takeover of an airline in the U.S. and declared that "it's not about to start here."
In the final analysis, Delta's creditors will be key to the success -- or lack thereof -- of the carrier's efforts to stave off US Airways' overtures and to go it alone. US Airways has offered to pay the unsecured creditors $4 billion in cash and 78.5 million shares of US Airways stock. Last week, a group of 17 creditors who hold $2.25 billion in unsecured claims against Delta urged the company to weigh all of its options and to consider alternatives to its own reorganization plan.
The Delta drama likely will play out over many months. Fools should realize that while the company's share price is up fourfold from its 52-week low, in a bankruptcy restructuring, shareholders of the common stock generally are left out shivering in the cold. I'd therefore urge Fools with an interest in participating in Delta's $1.32 share price to simply recognize the distinct difference between investing and gambling for fun.
For related Foolishness:
