DOJ hasn't killed a merger with less than 30% of market share in 30 years.
Analysts bullish on bid for Delta
Skeptics say feds could scuttle it
By
RUSSELL GRANTHAM
The Atlanta Journal-Constitution
Published on: 11/17/06
Wall Street is giving US Airways high odds of succeeding in its bid to buy Delta Air Lines, but others say not so fast.
Some industry analysts say US Airways' blockbuster, unsolicited bid — the value of which has risen to almost $8.8 billion since it was announced Wednesday — has as much as an 80 percent chance of happening.
COMMITTEE OF INFLUENCE
Delta's unsecured creditors committee has nine members who represent thousands of creditors. The committee, which includes smaller creditors as well as some of the largest, plays a key role in deciding whether to back the airline's reorganization plan or a potential outsider's plan, such as US Airways' merger proposal.
• Boeing: The jet maker has a $3.7 billion claim from Delta's future aircraft commitments.
• Fidelity: An investment firm headquartered in Boston.
• Coca-Cola: Atlanta-based soft drink maker has a claim of at least $468,034.
• Pratt & Whitney: The engine supplier, a unit of United Technologies, has claims of at least $3.6 million.
• Pension Benefit Guaranty Corp.: The federal agency insuring pensions has a $2.9 billion claim.
• Air Line Pilots Association: The pilots union holds a $2.1 billion claim related to its pay and pension concessions.
• Bank of New York: This big banking firm is a trustee for Delta bondholders.
• U.S. Bancorp: A financial institution.
• MacKay Shields: An investment unit of New York Life.
But others contend that federal regulators' scrutiny of the would-be takeover of Delta could delay the Atlanta airline's exit from bankruptcy by months, or the regulators could even scuttle the deal over antitrust issues.
Such concerns are among the reasons that a court-appointed creditors committee, which holds huge sway in Delta's Chapter 11 reorganization, might pass on the deal that would create the nation's largest airline, according to a person familiar with the bankruptcy case.
While that person, who requested anonymity, said creditors might conclude the proposed merger is better than keeping Delta independent, they also noted that it will likely take weeks of analysis by Delta management and the creditors committee before a decision is made on whether to encourage the deal.
US Airways took its hostile bid public Wednesday after being twice rebuffed by Delta's management, which had informed creditors about the earlier overtures.
If successful, US Airways would combine two airlines whose routes overlap 36 percent — more than any other potential marriage of Delta and another airline, according to the person familiar with the bankruptcy proceedings. That overlap dramatically raises the odds that the U.S. Department of Justice will reject or seriously delay the merger, said the person.
To get government approval, US Airways would not only have to shed one of two competing shuttle subsidiaries the two airlines operate in the Northeast, but also might have to shed more than 10 percent of its overall operations, the person said. That might include dismantling the US Airways hub in Charlotte, which serves many of the same markets as Delta's Atlanta hub.
"There is some view that this would be the most difficult merger to get done because of the overlap," the person said. "You have to know this is going to get a lot of scrutiny."
Creditors a key
Besides those hurdles, the deal also faces opposition from Delta's management. It also might encounter political opposition, ranging from cities concerned about their air service to resurgent Democrats on Capitol Hill who may investigate the effects of airline consolidation.
But at least initially, the deal also will swing on whether US Airways can convince enough members of Delta's influential creditors committee of its merits. The nine-member unsecured creditors committee — which includes such corporate icons as Coca-Cola and Boeing — has a big say in Delta's future because it represents thousands of creditors who will ultimately vote on the reorganization plan Delta needs to exit from bankruptcy protection. Delta filed for Chapter 11 bankruptcy last fall.
As part of that role, the committee also has significant influence in shaping the reorganization plan, including choosing Delta's board of directors and its next management team, said Jeff Morris, a law professor and bankruptcy expert at the University of Dayton School of Law.
Delta's secured lenders — those whose loans are backed by aircraft and other assets — technically have even more clout, but their debts are often paid off in a merger, Morris said.
"They can't complain if you pay them off," Morris said.
US Airways' offer is backed by a $7.2 billion financing commitment from Citigroup. The airline has offered to pay creditors $4 billion in cash and give them 78.5 million US Airways shares — initially worth $4 billion but now up to almost $4.8 billion at Thursday's market close. US Airways shares have risen 19 percent since the bid was announced.
Delta's unsecured creditor committee, with its diverse members ranging from Boeing to bond investors to trade vendors to its pilots' union, will undoubtedly have differing perspectives on US Airways' offer, said Morris. Some may view US Airways as "coming in to get the good stuff" now that Delta's prospects are improving, he said.
The view of others, he said, is "how do I get my money fast?"
The Atlanta unit of the Air Line Pilots Association, which has a $2.1 billion claim stemming from a prior deal with Delta in which it agreed to huge concessions, has said it is waiting for more information.
Attorneys for Coca-Cola and Pratt & Whitney, other members of the committee, could not be reached for comment Thursday.
Handicappers optimistic
While Wall Street analysts acknowledged that the proposed merger faces potential antitrust issues and other hurdles, some concluded the odds are still fairly high that US Airways will succeed.
Merrill Lynch analyst Michael Linenberg gives US Airways about a 60 percent chance of getting a merger agreement, citing Chief Executive Doug Parker's track record with turning the money-losing America West into a profitable carrier that acquired US Airways in a merger that many in the industry view as a success.
"We think this is achievable. If there is one management that is able to pull this off, it is this management," Linenberg said in a Thursday conference call with investors. He said US Airways will agree to whatever conditions the Justice Department sets to approve the merger.
JPMorgan analyst Jamie Baker puts the odds even higher, despite his firm's analysis that a US Airways-Delta merger would affect more cities than any other likely combination. The increased market concentration in 11 cities, including Boston, Tampa and Seattle, is "potentially unacceptable to regulators," he said in a report.
Still, he said there's an 80 percent chance that US Airways or another acquirer will succeed in getting creditor and regulatory approval.
"Clearly, lots of twists and turns lie ahead," he said.
Delta execs silent
Meanwhile, Delta executives have seemingly climbed into the cellar and slammed the door, perhaps to revise the reorganization plan they have been working on for months.
While US Airways CEO Parker did a full-court press Wednesday of media interviews and conference calls with investors, Delta CEO Gerald Grinstein restricted his response largely to a memorandum to employees that was forwarded to the press.
On Thursday, Delta's executive vice president in charge of routes and revenue management, Glen Hauenstein, canceled a public appearance at Kennesaw State University.
"There are other things occupying our executives' time, so we will reschedule," said Delta spokeswoman Gina Laughlin, adding that the airline's executive team is reviewing the proposal "as we are obligated to do."
COMMITTEE OF INFLUENCE
Delta's unsecured creditors committee has nine members who represent thousands of creditors. The committee, which includes smaller creditors as well as some of the largest, plays a key role in deciding whether to back the airline's reorganization plan or a potential outsider's plan, such as US Airways' merger proposal.
• Boeing: The jet maker has a $3.7 billion claim from Delta's future aircraft commitments.
• Fidelity: An investment firm headquartered in Boston.
• Coca-Cola: Atlanta-based soft drink maker has a claim of at least $468,034.
• Pratt & Whitney: The engine supplier, a unit of United Technologies, has claims of at least $3.6 million.
• Pension Benefit Guaranty Corp.: The federal agency insuring pensions has a $2.9 billion claim.
• Air Line Pilots Association: The pilots union holds a $2.1 billion claim related to its pay and pension concessions.
• Bank of New York: This big banking firm is a trustee for Delta bondholders.
• U.S. Bancorp: A financial institution.
• MacKay Shields: An investment unit of New York Life.
