Investors bet Midwest will give in
By
DAVE HIRSCHMAN
The Atlanta Journal-Constitution
Published on: 02/14/07
Large investors appear to be betting that AirTran Airways will persist in its 2-month-old buyout bid for Midwest Airlines, perhaps by sweetening its offer once again.
The price of Midwest stock climbed when AirTran launched its hostile takeover effort in December, and again when AirTran made a tender offer directly to shareholders in January. Since then it has remained close to, or even above, the $13.25-a-share offer.
AirTran has extended the tender offer deadline to March 8, after it was unable to lock up a significant amount of Midwest stock in the first few weeks. As the original early February deadline neared, AirTran had commitments from shareholders to sell just 38,000 of more than 19 million outstanding shares.
By bidding up the value of Midwest stock, investors are betting either that AirTran will be back with another offer, or that Midwest's plan to boost revenue and profits will succeed — a prospect some financial analysts doubt.
"AirTran and Midwest are a perfect match," said Vaughn Cordle, chief financial analyst at AirlineForecasts, a Virginia consulting firm. "The Midwest shareholders would be foolish to turn it down."
Cordle said Midwest's most profitable routes between its Milwaukee hub, New York and Boston are vulnerable to new competition from JetBlue, Southwest or a revived Northwest Airlines.
At the same time, AirTran needs to expand beyond its Atlanta hub, which accounts for two-thirds of the Orlando-based carrier's capacity.
"They'd be better off merging," Cordle said of Midwest, "and AirTran is an excellent fit geographically and with complementary aircraft fleets. There's really no alternative suitor."
AirTran and Midwest both fly Boeing 717s as their short-haul workhorses.
AirTran officials say their current tender offer is as generous as the company is willing to be without access to detailed financial information and operational details that Midwest has been unwilling to provide.
Midwest has rebuffed AirTran overtures since June 2005, when AirTran offered $4.50 a share for the company.
The two are battling in court over access to Midwest's shareholder list, but AirTran officials say that list is becoming less relevant as institutional investors buy up Midwest shares.
"Institutions used to own about 40 to 45 percent of Midwest," said Richard Magurno, AirTran's general counsel. "Now, that appears to be changing. A New York hedge fund is now the largest shareholder."
A list of Midwest ownership filed with the Securities and Exchange Commission this month shows the Milwaukee-based Heartland Fund as the largest stockholder with 8.9 percent.
Heartland officials didn't return calls for this article. But fund managers have steadfastly backed the Midwest board by complying with the board's request not to tender shares.
Midwest officials have described AirTran's buyout offers as "opportunistic," "disadvantageous" and "inadequate." They insist the company can do better on its own with its premium, all-business-class seating configuration and fresh-baked, chocolate chip cookies served in flight.
"The offer does not fully reflect the long-term value of Midwest's strategic plan, including its strong market position and its future growth prospects," the company said in a recent SEC filing.
"This strong [2006] performance, combined with Midwest's successful cost reduction efforts, generated a $66 million improvement in operating income."
Midwest stock had already jumped 66 percent from its post-9/11 low when AirTran launched its takeover effort two months ago.
Richard Aboulafia, aerospace analyst at the Teal Group, said Midwest's response hints at a possible deal.
"When you say you're undervalued, it implies a transaction is possible at the right price," he said.
Midwest was profitable in 2006 for the first time since the terror attacks of 2001, and it has issued bullish forecasts.
But consultant Cordle cautions Midwest against overplaying its hand, and he says AirTran would be unwise to pay too much.
"Remember Independence Air?" he said of the now-defunct carrier.
"They had a chance to merge with Mesa Airlines for $12 a share. But they destroyed $1.5 billion in market value by insisting on going it alone. Midwest should keep that in mind."
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