DL POR - US Response: Analysis

[USA320Pilot]

Delta Air Lines filed its POR and Disclosure Statement with the bankruptcy court today and aggressively attacked US Airways’ merger proposal.

Delta valued the company following its emergence from bankruptcy at about $9.4 billion to $12 billion.

In a research report, Lehman Brothers Airline analyst Gary Chase said, “Valuation predicated on a $15bn claims pool (smaller than US Airways estimates) and a 5.5x - 6.25x EV/EBITDAR multiple of 2007 EBITDAR. Group not out of line with that now, but that circumstance has arisen only following the merger announcement. Absent consolidation potential (which Delta's plan argues against), we would see 5.0x-5.5x as a more reasonable valuation ($1.5bn to $3bn less than Delta’s claim)."

Thus, if Lehman Brothers estimate is accurate than Delta has grossly over exaggerated the value of the airline.

If we assume Lehman Brothers valuation is correct than Delta could be valued at significantly lower than management’s claim, possibly as low as $6.4 billion. For discussion purposes, if we take the mean of Lehman Brothers claim or a valuation $2.25 billion less than Delta management’s position than the Atlanta-based airline could be worth $7.175 to $9.75 billion, which could be less than US Airways initial bid.

Yesterday the AP reported “US Airways is willing to increase its $8.4 billion bid for Delta Air Lines Inc. if Delta can justify that it is worth more, an official with knowledge of US Airways' plans told The Associated Press on Monday. The official, who spoke on condition of anonymity because of the sensitivity of the talks, said US Airways first needs to see how much Atlanta-based Delta values itself at in its reorganization plan, which it could file with the bankruptcy court as early as Tuesday, and whether any other airline makes a bid for Delta,†the news agency said.

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Shortly following Delta’s filing Reuters reported US Airways it will remain a "dedicated bidder" for Delta Air Lines Delta's rejection of the bid. An airline spokeswoman said the carrier believes its proposal to merge with Delta offers the best value for its stakeholders.

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According to Chase, “We fully expect a comprehensive US Airways response, but not for several days. We believe US Airways can raise its bid, but we do not expect the company to overpay for Delta.â€

In my opinion, the fight for Delta Air Lines has just begun and the threat to Delta’s stand-alone plan remains very real and compelling. If not Gerry Grinstein would not be veraciously attacking US Airways’ plan with such energy.

Regards,

USA320Pilot

 

[abe]

In my opinion, the fight for Delta Air Lines has just begun and the threat to Delta’s stand-alone plan remains very real and compelling. If not Gerry Grinstein would not be veraciously attacking US Airways’ plan with such energy.

Regards,

USA320Pilot

I agree that the fight isn't over yet. It will be interesting to see the creditors' response in the coming days and weeks.

With regards to Lehman and the separate bondholder/creditor group, remember they are small time players in this deal. By themselves they are tiny, and even as a group they have no real clout (except to put out press releases that promote their view).

Jerry's plan won't satisfy everyone. But he know's it doesn't have to.

He can't catch all the fish, no matter what his bait looks like. But he only needs some of the big fish anyway.

Will the big fish bite?? I believe they will...in a big way.

I guess we'll find out soon!

Abe

 

[WorldTraveler]

DL's valuation is very much in line with UA's adjusted for UA's slightly larger size. DL also comes out of BK w/ significantly less debt than UA. DL's valuation was done by Blackstone Group, one of the world's top restructuring consultancies.

Why don't you also look at what Gary Chase wrote over the past few weeks trying to support a US takeover of DL and then you'll see why he wants to lowball DL. Just follow the money and anything can be explained. Gary Chase is not a neutral participant in this discussion.

 

[DLFlyer31]

Gary Chase is not a neutral participant in this discussion.

Neither is the Blackstone Group. How many millions of dollars are the receiving from DL?

 

[TechBoy]

DL's valuation is very much in line with UA's adjusted for UA's slightly larger size. DL also comes out of BK w/ significantly less debt than UA. DL's valuation was done by Blackstone Group, one of the world's top restructuring consultancies.

Why don't you also look at what Gary Chase wrote over the past few weeks trying to support a US takeover of DL and then you'll see why he wants to lowball DL. Just follow the money and anything can be explained. Gary Chase is not a neutral participant in this discussion.

Blackstone's estimate of DL's valuation is just that -- and estimate. And not by an unbiased source.

But I don't think that the numbers are the real determinant here. The real question is whether the creditors are willing to wait and see if DL really has a turnaround which will make the equity stakes worth what Blackstone says. That may be a likely outcome, but it is by no means certain. The US offer, on the other hand, consists of cash and a marketable security with currently known market value. The creditors will get paid now, in a certain amount.

So will the creditors take a bird in the hand now, or be willing to wait for the possibility of 1.2 birds in the bush later? (BTW, if the DL POR only came up with a valuation similar to the US offer, it would have been DOA.)

 

[WorldTraveler]

Delta has 3 presentations on its website at
http://www.delta.com/about_delta/corporate...tions/index.jsp
that I would suggest anyone that cares anything about the discussion review – even if you don’t agree. I have yet to see anything remotely comparable addressing the same issues from US – because they can’t address them without telling lies. You can’t make DL/US look good for anyone except US’ owners.

As for valuations, yes, everyone is biased in some way or the other; the question is whether the bias is too great for the person to be factual. Let me encourage you to listen to the antitrust webcast at the above link. Who was the very first person to yell out a question and try to tell the expert (who had decades of experience in the DOJ) that he didn’t know what he was talking about? None other than Gary Chase. In fact, every one of the industry analysts tried to downplay the competitive concerns by manipulating the facts or believing that the industry has changed to the point that eliminating a competitor is no longer such a bad thing.

So why can’t supposed industry analysts honestly evaluate anything? Because they and their employers make money on deals in the airline industry and don’t when airlines remain independent. They desperate want to sell their “expertise†despite its obvious bias which is towards consolidation in the industry.

As I said in my discussion regarding the role of mergers in the industry, they will have to come either when one carrier is failing or when there are not significant impacts to consumers in the form of reduced capacity. Since every network airline has some overlap with every other carrier – if even on a regional basis – it is impossible to merge any two US network carriers without resulting in the loss of service. There is absolutely no appetite in Washington for the American people to pay that kind of price for an industry that is as stable now as it ever gets – and one in which the network carriers are on the best financial footing they’ve been on in decades.

 

[abe]

Delta has 3 presentations on its website at
http://www.delta.com/about_delta/corporate...tions/index.jsp
that I would suggest anyone that cares anything about the discussion review – even if you don’t agree. I have yet to see anything remotely comparable addressing the same issues from US – because they can’t address them without telling lies. You can’t make DL/US look good for anyone except US’ owners.

I agree...the presentations paint a pretty clear picture of some of the pitfalls of this deal.

Employees (of both carriers) need to check out that 3rd presentation, "The Summary of Delta's Analysis of USAirways Merger Proposal". Some of the later slides there paint a pretty bleak picture of the future combined carrier. Especially the debt level!

As Jerry pointed out in the audio portion of the presentation, the two biggest items that doom airline mergers to failure are a high debt level and labor. This one contains both of these problems...big time!

Also interesting to me was the timeline slide of the "estimated" extra time in BK for Delta (and their creditors) if this thing goes through. Important things to consider if you are a long-term, "big time" Delta creditor.

Abe

 

[brokenwrench]

So will the creditors take a bird in the hand now, or be willing to wait for the possibility of 1.2 birds in the bush later? (BTW, if the DL POR only came up with a valuation similar to the US offer, it would have been DOA.)

The US offer is $4B cash and the other 4.5B in stock.
The DL plan is $9-12B. So lets split it and call it $10B.

Since both have a "risk" piece being stock and only one offering cash. The cash being the "bird in hand" would make the formula somthing like this for the creditors.

Bird in hand ($4B cash) or the possibility of 2.5 (DL equity) birds in bush.

 

[USA320Pilot]

I want to start this post by stating I wish no ill will for the Delta employees. We at US Airways fully understand bankruptcy and M&A stress because we have lived it too.

Now we are working for a company that is going to make about $500 million this year with a business plan that is working in the marketplace.

Here are some interesting points surrounding today's merger news.

US Airways Comments on Delta Standalone Plan

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US Airways to Continue Delta Bid, Shares Trade Sharply Higher in Afternoon Trading

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USA320Pilot comments: It is my understanding the US Airways - Delta M&A game is just beginning.

Today in a conference call Delta Chief Executive Gerald Grinstein told analysts "Every carrier is studying every other carrier all the time, and if the process of consolidation starts, you would not want to be left out. If the process happens, I would hope that we would be an acquirer rather than an acquiree."

According to the AP, the creditors reamin the key. The AP indicated, "Creditors holding at least two-thirds of the value of total impaired claims -- debt that will not be repaid in full -- must vote in the plan's favor for it to succeed. The bankruptcy court also needs to approve the plan."

"The airline's unsecured creditors generally will receive new shares for their claims. Current holders of Delta common stock will receive nothing, and those shares will be canceled."

US Airways is offering to pay creditors $4 billion in cash and 78.5 million shares of US Airways stock, and analysts have said that some creditors could find the cash tempting. Delta said it has not yet decided whether its plan would offer any cash.

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How could it be that Delta's stand-alone plan had an exclusion that "the figures don't include an executive compensation package, which the airline says would be added later" and it does not offer the creditors any cash?

Now why would the executive compensation package be excluded from the plan?

In a statement, US Airways CEO Doug Parker said, "We remain a disciplined and determined bidder for Delta. We continue to work productively with the Creditors Committee and the Ad Hoc Bondholders Committee."

Again, it's my understanding this is just the beginning of the hostile takeover process.

Meanwhile, it appears Delta may not object to M&A activity, Delta management is hiding their executive compensation plan, and Delta's plan may be grossly overvaluded/does not include cash. As I indicated above, it's my understanding US Airways is going to become even more aggressive and will turn up the heat on Delta in the not-so-distant future with its updated hostile takeover bid.

Will a merger happen? I do not know because the parties continue to fight, but what I do know is that US Airways' bid is expected to be sweetened and Delta's stand-alone plan is likely to be closely evaluated because it has a wide valuation spread.

Best regards,

USA320Pilot

 

[TechBoy]

Delta has 3 presentations on its website at
http://www.delta.com/about_delta/corporate...tions/index.jsp
that I would suggest anyone that cares anything about the discussion review – even if you don’t agree.

Let me encourage you to listen to the antitrust webcast at the above link.

Interesting reading.

Anyone can hire a good antitrust expert to spin their views on a particular transaction. I've done it many times myself (and all transactions were approved!).

Looking at the slides, there is no doubt that there will be significant divestitures required at DCA and LGA, but that can be done. Also, slide 12 shows some routes that could have some competitive problems although there are reasonable substitutes for most of them.

The only real issue that could block this transaction would be the small cities where the US/DL total is very high. DL's argument that the LCCs are unlikely to serve most of these cities is consistent with their past practices. But DL doesn't complete the necessary analysis on this key point. The question is not whether LCCs will enter, but whether any carrier will enter. If US/DL raises fares significantly in these markets, then there would be a huge incentive for UA/AA/CO/NW to enter. All of these carriers have the right sized aircraft to compete in small cities. The only question is whether they have hubs close enough to create viable competition. IAD, MEM, IAH, DFW, MIA would appear to be viable connecting points for many of these cities. However, ATL and CLT may be the only viable connecting points for some routes out of some of these cities. THAT is the real antitrust question here when you cut through all the propaganda.

I'm not an antitrust expert but I've spent a lot of time working on deals with antitrust problems. I'm not sure whether this deal could be approved or not, but I do think that it is not as clear cut as either side makes it out to be.

The US offer is $4B cash and the other 4.5B in stock.
The DL plan is $9-12B. So lets split it and call it $10B.

Since both have a "risk" piece being stock and only one offering cash. The cash being the "bird in hand" would make the formula somthing like this for the creditors.

Bird in hand ($4B cash) or the possibility of 2.5 (DL equity) birds in bush.

Hardly.

The US stock is a known quantity that currently trades at that value. There is little question that the DL creditors could quickly sell their stock and monetize its value.

The DL stock "estimated value" is an assumption of what the market will value the new DL stock after it has emerged from bankruptcy and built a profitable business. That is very different from the value of the US stock that currently trades.

 

[flyingcat]

Am I the only one who is concerned about the projections that DL is presenting.

A market capatilization near WN, higher than AA, UA, and CO. A margin of return of 10.5%.

Can anyone honestly believe that Delta will realistically hit those targets. I think Delta will be profitable, but nowhere near that high.

I am not a Delta employee but surely these estimates must concern some of you.

 

[michael707767]

Am I the only one who is concerned about the projections that DL is presenting.

A market capatilization near WN, higher than AA, UA, and CO. A margin of return of 10.5%.

Delta is projecting a company value of 10-12 billion. That is not the same as the market cap. Two different things.

 

[flyingcat]

Delta is projecting a company value of 10-12 billion. That is not the same as the market cap. Two different things.

Valuation or as the POR puts it consolidated equity value.

sorry for my gaff but it is still higher than the airlines I listed. So does anyone here think that such an outcome is within the realm of possibility?

 

[NYCDelta]

Am I the only one who is concerned about the projections that DL is presenting.

A market capatilization near WN, higher than AA, UA, and CO. A margin of return of 10.5%.

Can anyone honestly believe that Delta will realistically hit those targets. I think Delta will be profitable, but nowhere near that high.

I am not a Delta employee but surely these estimates must concern some of you.

I think estimates from both sides simply aren't true-there is probably wishful thinking all around. I just hope that DL's plan passes muster from the creditors. I think if they approve it, then it must be ok.

 

[abe]

Hardly.

The US stock is a known quantity that currently trades at that value. There is little question that the DL creditors could quickly sell their stock and monetize its value.

Not the way I understand it.

With Parker's plan the creditors will get their money when the deal finally happens (if ever).

With the scrutiny that is already taking place on Capital Hill, the regulatory part of this thing will drag out for a long time.

The "synergies" will also take many months as Parker tries to go back and renegotiate leases that have already been settled. Not an easy process.

In the end, if all the stars align and he is able to pull it off, Parker's plan will pay out. There is a lot of uncertainty out there that it can be pulled off even if the creditors are on board. Why do I say this?? Make a list for me of all the other hostile takeovers in this industry that have succeeded.

While all of this is going on, Parker will have to get the Delta pilots on board (not going to happen). Absent this, he will need to seek 1113 relief right away just to set up a codeshare with US Airways. You wanna talk about labor problems....that's just the tip of the iceberg!

As Jerry stated in one of the presentations today, the 2 big things that doom mergers to failure are enormous debt load and labor issues. He was talking about normal mergers, where both partners are willing participants.

The debt under Parker's plan will be 23 Billion....way more than any carrier. I'm scared to even think about the labor issues!

The bean counters at Delta's largest creditors are busy as we type looking at all of this stuff. And Jerry get's to gauge their response and tweak as needed.

He doesn't need 100 percent participation....just enough to carry the day. And he's already got a big chunk (Delta pilots represent 14 or so percent).

If you're still willing to bet Parker has a chance, you would do better to non-rev to Vegas and at least get a few free drinks as you lose your money.

Abe