Airline Industry Buzzes With Merger Talk
DealBook, New York Times, 12/13/2006
Editor's Note: On Tuesday, December 19, Delta Airlines announced its plans to file Chapter 11 reorganization and refuse the bid from US Airways to acquire the airline. Also, Qantas Airways announced Thursday, December 14, that it had accepted an $8.64 billion takeover offer (5.60 Australian dollars a share) from a private equity consortium including Australia's Macquarie Bank and the Texas Pacific Group. The announcement followed Qantas' rejection on Wednesday of the group's offer of 5.50 Australian dollars a share.
Fasten your seatbelts: Deal discussions in the airline industry are moving into high gear. United Airlines and Continental Airlines have been holding talks on a potential merger, a combination that would create the biggest domestic airline, with an overall value of $9 billion, people involved in the negotiations told The New York Times late Tuesday. On Wednesday, AirTran Holdings , the parent company of low-cost carrier that competes with Delta Air Lines , offered to buy Midwest Air Group for $11.25 per share in cash, or about $290 million.
Also on Wednesday, Australian airline Qantas rejected a previously announced $10.9 billion ($8.6 billion) takeover offer from a group led by Macquarie Bank and private equity firm Texas Pacific Group.
These developments come as US Airways is trying to persuade Delta's creditors to support its proposed $8.6 billion takeover of Delta, which is operating in bankruptcy protection. Northwest Airlines, which is also in Chapter 11 protection, recently said it plans to hire investment bank Evercore Partners to help evaluate "strategic alternatives" and is offering Evercore a $2 billion bonus if the airline is sold.
Much of the deal-making is still very preliminary, and many of these potential pairings could face serious obstacles. For example, it is still unclear how antitrust regulators would react to large-scale consolidation in the airline industry. And labor groups, a powerful constituent in the airline industry, are often wary of such deals. The talks between United and Continental have an additional complication: A previous agreement between Continental and Northwest allows Northwest to block certain merger transactions involving Continental.
United's chief executive, Glenn Tilton, has repeatedly said that the United States airline industry is too fragmented and that consolidation is overdue. Mr. Tilton previously approached Delta about a possible combination before turning to Continental, two executives who were skeptical about a United-Continental merger told the Times.
"Glenn Tilton has called everyone looking for a date," airline consultant Michael Boyd told The Associated Press. "He doesn't want to run an airline, he wants to merge it."
Earlier this week, Mr. Tilton told analysts, "We are not waiting for opportunities to come to us simply because we haven't identified to you which one works best."
United and Continental still want to see how regulators handle US Airways' play for Delta, the Times report said. While Delta management firmly opposes the deal, a flurry of meetings later this week among Delta's creditors and others on the US Airways proposal could help decide whether Delta management will be forced to consider the US Airways offer.
Kevin Mitchell, the chairman of the Business Travel Coalition, suggested that the recent rush to merge is misguided. In a statement posted on the coalition's Web site last Tuesday, he said it is likely to hurt consumers even as it fails to address the airline industry's core challenges. But Mr. Mitchell acknowledged that deal talks are not likely to die down any time soon:
"Other merger proposals would follow as sure as the sun rises in the east," he said. "What's more, these potential transactions represent a near-term fix to the industry's difficulties and do not address systemic profitability problems and root causes."