Go On Delta, Take the Money and Merge

Delta, Mergers/Finance, Northwest, US Airways

usscornedI don’t know about you, but all this merger talk and no action is starting to make my eyes glaze over. I want action!

We had a couple of pieces of news today that I thought it would be worthwhile to discuss. First, US Airways decided to sweeten the pot and increase their offer by oh, a couple billion dollars.

The previous US Airways offer was for $4 billion in cash and 78.5 million shares of stock in the new company. At the time, that was valued at $8 billion but as the US Airways stock price rose, it came up to about $8.5 billion. The new offer adds another $1 billion in cash and 11 million more shares of stock. This brings the current offer market value up to $10.2 billion. Oh, and now the offer expires on February 1, so they’re trying to get things moving here.

Previously, US Airways said they felt the original bid was more than fair. They said that Delta’s valuation was overinflated and they weren’t going to budge on the numbers. So why the change in heart? Well, clearly they found a good reason to bump it up, and I’m guessing it’s from informal creditor discussions. The creditors may have been on the fence before, but this has to push them over.

Meanwhile, Delta’s response to the proposal was that it “does not address significant concerns that have been raised about the initial US Airways proposal and, in fact, would increase the debt burden of the combined company by yet another $1 billion.” That doesn’t really say very much to persuade me that they have a strong argument here.

More important is the response from the creditors that came out tonight. This one “calls on the company to provide thoughtful and unbiased consideration to US Airways’ enhanced offer.” Sounds fair to me. What exactly do they want?

Well among other things, they want US Airways to be allowed to perform due diligence, they want Delta management to postpone a Disclosure Statement scheduled for February 7 so they can evaluate the offer, and, interestingly they want the company to “Desist from taking actions intended to deter other companies from proposing transactions with Delta that may result in greater creditor recoveries than under a stand-alone Chapter 11 plan.”

Now I’m not sure what Delta has been doing to deter other companies, but that’s a fairly strongly worded accusation there. One thing that might be bugging the creditors is this other tidbit of news that came out today saying that Delta and Northwest have been talking merger.

Wait, Delta said they wanted to come out as a strong independent carrier when US Airways made an offer, but secretly they’ve been talking to Northwest about a merger as well? That doesn’t make sense. Oh wait, yes it does. I think they see the writing on the wall.

If Delta thinks there’s a good chance that the US Airways bid will be accepted, then they must be scrambling for another alternative more to their liking. Why is this alternative better? Well, they could be the surviving management team theoretically. That would certainly be more interesting to them. Why else?

If you read this article, you’ll see that they are discussing a possible combination AFTER they exit bankruptcy. Remember the United bankruptcy? Remember how much money the management team made when they emerged? I would assume that the Delta management team stands to benefit as well as long as they bring the company out of bankruptcy. They would be able to do that if a merger occurred after exit.

A merger after exit also means a more uncertain future for the creditors. That means the creditors would have to accept Delta’s standalone plan and then hope the stock price would increase under a merger scenario after they come out. If Delta can convince the creditors that this is in their best interest, then it could become more attractive. There’s a lot more risk in that though. The creditors could also just take the $5 million from US Airways along with the stock and run.

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3 comments on “Go On Delta, Take the Money and Merge

  1. I think a key issue in the merger talks is where the airline will call a future home. There is a lot of support from the Atlanta community and employees at Hartsfield to keep Delta in Georgia. Do many of the creditors take an active interest in Atlanta’s economy? I know several major banking institutions have strong ties with the economy of Atlanta.

    Also, what about the resulting destinations of the merger? I think the deal with Northwest would allow for expansion into Asia, an area of the world that only sees a limited Delta presence. Northwest would allow for Delta customers to travel to just about every major Asian city, as well as provide a hub in Tokyo. US Airways has no Asian destinations and many of their existing destinations share service with Delta already anyways. From a price standpoint, they’d be reducing competition in these markets.

    Overall, I know it’s really up to the creditors. But I think Delta has the ability to get out of bankruptcy independently and recover very successfully.

  2. Couple more things:

    1) Why would the creditors ask for Delta to postpone the disclosure statement hearing until later? I mean, wouldn’t that kind of force Delta to take the merger? After all, the offer expires the 1st.

    2) I think the Northwest merger deserves a good analysis. I mean, the two are distinct enough in terms of destinations, hubs, routes, etc. that would provide for a decent merger. After all, you did say “I would argue that Delta and United or Delta and Northwest make a much more attractive couple on many levels, but sometimes you just try to do the best you can with what’s available.” Now that NWA is available, why not that a look at that? I realize the talks are for post-bankruptcy merging goodness, but the deal still would help stablize the emerging company, increase stock prices, etc., don’t you think?

  3. Thanks for taking the time to write those comments. To address what you say in the first comment . . .

    I don’t think headquarters location matters to creditors at all. First and foremost should be their ability to make money on the deal. After that, I’d imagine retaining service levels in Atlanta might matter to those who are local. I’m sure that some frequencies will be cut as part of the 10% reduction in the merger, but I doubt destinations will be lost. This shouldn’t be a hang up here.

    I agree that a Delta/Northwest route map looks a lot better, but that doesn’t mean it’s the best deal for those who hold the power. If the US Airways deal truly is the best deal out there monetarily, that should be the one they choose.

    And in your second comment . . .

    I think the creditors want Delta to postpone the disclosure statement because the deal with US Airways wouldn’t be completed by Feb 1. The next step would be for Delta to give US Airways approval to conduct due diligence. US Airways is only looking for that approval before Feb 1. It would still take more time for the deal to close.

    I certainly agree that Delta should investigate all possible merger possibilities. Unfortunately, the only thing we know is that there have been talks. If there is truly an option with Northwest, then they should lay it out there so the creditors can evaluate it.

    I hate to sound callous about this, because as a proud airline dork I love to speculate about fleet commonality and route maps, etc. But the reality is that from a creditor point of view, it’s going to come down to money, so that’s how we need to view this.

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