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Delta's Rejection Of US Air Offer Not Seen As Last Word
December 19, 2006
By Terry Kosdrosky and John D. Stoll
Of DOW JONES NEWSWIRES
Delta Air Lines Inc.'s (DALRQ) strong rejection Tuesday of US Airways Group Inc.'s (LCC) merger proposal doesn't necessarily ground the idea, especially since the powerful creditors in Delta's Chapter 11 case have so far been silent on the issue.
Delta on Tuesday outlined an extensive, stand-alone reorganization plan that would provide creditors with a return of 63% to 80%, but no cash payout.
Delta Chief Executive Jerry Grinstein also outlined the board's rejection of US Airways's $8.4 billion hostile takeover bid in a letter to his counterpart at US Airways, Doug Parker. Grinstein argued that Delta's reorganization plan is a better deal for creditors, that the Department of Justice would reject a merger on antitrust grounds, that it would saddle the company with too much debt and that it would be difficult to merge the operations of the two carriers.
Though analysts say Grinstein raised some legitimate points, Delta doesn't necessarily have the final say in the matter. In addition, the industry has to consolidate to avoid having more carriers wind up in Chapter 11 during the next economic swoon, industry experts say.
So far, Delta has refused to supply confidential financial information for US Airways to conduct due-diligence. Creditors could force that to happen, since they have a legal responsibility to obtain the best possible recovery.
"The creditors committee has remained pointedly silent," said Fulbright & Jaworski bankruptcy partner William J. Rochelle III, who represents major Delta creditor Boeing Co. (BA). "That's the swing vote."
Rochelle said US Airways could come back with a stronger offer to sweeten the deal.
Parker, the US Airways CEO, said in a press release that the carrier had always expected Delta to file a stand-alone plan and that US Airways remains "a disciplined and determined bidder for Delta." He said that US Airways continues working with Delta's creditors committee and that US Airways executives "recognize and appreciate the creditors' ultimate authority in this process."
US Airways representatives have declined comment on reports that the airline could adjust its offer for Delta.
Bob Mann, an airline consultant and analyst with RW Mann & Co., said the creditors likely will demand that Delta and US Airways open their books. "I suspect the creditors will get their due and have the opportunity to examine each of the proposals," he said. "They have a lot of votes here."
Rochelle said Delta may be resistant to opening its books to US Airways because US Airways could find information that could be used to better compete against Delta in the future.
US Airways shares were down 0.4% at $55.60 in afternoon trading Tuesday. The stock fell as low as $54.00 earlier in the session, hitting its lowest level since Nov. 15, the same day that the carrier made public its offer to acquire Delta.
Airline Consolidation Inevitable
Helane Becker, an airline analyst with The Benchmark Company, said some of Delta's points are "well-taken," but that Delta also "skirted a couple of issues," especially its argument that the merger would eliminate competition on the East Coast.
She said the airline industry needs to consolidate, but the problem is mergers are "messy" because of labor unions and antitrust issues. "Any merger with US Airways would take upwards of a year to do just because of labor and antitrust issues," she said.
But Delta's rejection doesn't lessen the likelihood of a merger with US Airways she said. "It just makes it more expensive," she said.
Industry Consolidation - creating four or five healthy airlines in the U.S. - would help prevent carriers from financial crises and Chapter 11s the next time the economy dips, she said.
One of Delta's main reasons for rejecting the US Airways proposal is the antitrust concern. Delta argues the merger has an "unacceptably high risk of not achieving antitrust clearance" and would waste time and money, prolonging a Chapter 11 case and eating into creditor returns.
Analysts seem divided on the Department of Justice's appetite for airline mergers.
Calyon Securities analyst Ray Neidl said that while airline mergers "have to happen," he doesn't think the government wants it right now. Mergers mean cutting routes, which can eliminate competition in some markets where low-cost carriers won't enter.
"I kind of feel that the DOJ and politicians don't want consolidation right now," he said. "It's got to happen at some point. The airlines and financiers are ready."
Mann said Delta may be overplaying the antitrust concerns, noting that there's less than a dozen "point-to-point" markets where the airlines overlap. "I think from a DOJ perspective, there's really less here than meets the eye," he said.
The Catch-22 of antitrust approval is that mergers that involve a high number of route overlaps, such as the Delta-US Airways proposal, draw more regulatory scrutiny, said Becker. But those mergers also create more cost savings than an end-to-end merger.
Mergers with route overlaps also tend to draw more Congressional scrutiny and consumer complaints, creating public pressure to reject them, she said.
"This is an industry that needs to consolidate, and I've said that, but it's also an industry that's very difficult to consolidate."
-By Terry Kosdrosky, Dow Jones Newswires; (313) 226-1251; [email protected]
-By John D. Stoll, Dow Jones Newswires; (313) 226-1249; [email protected]
December 19, 2006
By Terry Kosdrosky and John D. Stoll
Of DOW JONES NEWSWIRES
Delta Air Lines Inc.'s (DALRQ) strong rejection Tuesday of US Airways Group Inc.'s (LCC) merger proposal doesn't necessarily ground the idea, especially since the powerful creditors in Delta's Chapter 11 case have so far been silent on the issue.
Delta on Tuesday outlined an extensive, stand-alone reorganization plan that would provide creditors with a return of 63% to 80%, but no cash payout.
Delta Chief Executive Jerry Grinstein also outlined the board's rejection of US Airways's $8.4 billion hostile takeover bid in a letter to his counterpart at US Airways, Doug Parker. Grinstein argued that Delta's reorganization plan is a better deal for creditors, that the Department of Justice would reject a merger on antitrust grounds, that it would saddle the company with too much debt and that it would be difficult to merge the operations of the two carriers.
Though analysts say Grinstein raised some legitimate points, Delta doesn't necessarily have the final say in the matter. In addition, the industry has to consolidate to avoid having more carriers wind up in Chapter 11 during the next economic swoon, industry experts say.
So far, Delta has refused to supply confidential financial information for US Airways to conduct due-diligence. Creditors could force that to happen, since they have a legal responsibility to obtain the best possible recovery.
"The creditors committee has remained pointedly silent," said Fulbright & Jaworski bankruptcy partner William J. Rochelle III, who represents major Delta creditor Boeing Co. (BA). "That's the swing vote."
Rochelle said US Airways could come back with a stronger offer to sweeten the deal.
Parker, the US Airways CEO, said in a press release that the carrier had always expected Delta to file a stand-alone plan and that US Airways remains "a disciplined and determined bidder for Delta." He said that US Airways continues working with Delta's creditors committee and that US Airways executives "recognize and appreciate the creditors' ultimate authority in this process."
US Airways representatives have declined comment on reports that the airline could adjust its offer for Delta.
Bob Mann, an airline consultant and analyst with RW Mann & Co., said the creditors likely will demand that Delta and US Airways open their books. "I suspect the creditors will get their due and have the opportunity to examine each of the proposals," he said. "They have a lot of votes here."
Rochelle said Delta may be resistant to opening its books to US Airways because US Airways could find information that could be used to better compete against Delta in the future.
US Airways shares were down 0.4% at $55.60 in afternoon trading Tuesday. The stock fell as low as $54.00 earlier in the session, hitting its lowest level since Nov. 15, the same day that the carrier made public its offer to acquire Delta.
Airline Consolidation Inevitable
Helane Becker, an airline analyst with The Benchmark Company, said some of Delta's points are "well-taken," but that Delta also "skirted a couple of issues," especially its argument that the merger would eliminate competition on the East Coast.
She said the airline industry needs to consolidate, but the problem is mergers are "messy" because of labor unions and antitrust issues. "Any merger with US Airways would take upwards of a year to do just because of labor and antitrust issues," she said.
But Delta's rejection doesn't lessen the likelihood of a merger with US Airways she said. "It just makes it more expensive," she said.
Industry Consolidation - creating four or five healthy airlines in the U.S. - would help prevent carriers from financial crises and Chapter 11s the next time the economy dips, she said.
One of Delta's main reasons for rejecting the US Airways proposal is the antitrust concern. Delta argues the merger has an "unacceptably high risk of not achieving antitrust clearance" and would waste time and money, prolonging a Chapter 11 case and eating into creditor returns.
Analysts seem divided on the Department of Justice's appetite for airline mergers.
Calyon Securities analyst Ray Neidl said that while airline mergers "have to happen," he doesn't think the government wants it right now. Mergers mean cutting routes, which can eliminate competition in some markets where low-cost carriers won't enter.
"I kind of feel that the DOJ and politicians don't want consolidation right now," he said. "It's got to happen at some point. The airlines and financiers are ready."
Mann said Delta may be overplaying the antitrust concerns, noting that there's less than a dozen "point-to-point" markets where the airlines overlap. "I think from a DOJ perspective, there's really less here than meets the eye," he said.
The Catch-22 of antitrust approval is that mergers that involve a high number of route overlaps, such as the Delta-US Airways proposal, draw more regulatory scrutiny, said Becker. But those mergers also create more cost savings than an end-to-end merger.
Mergers with route overlaps also tend to draw more Congressional scrutiny and consumer complaints, creating public pressure to reject them, she said.
"This is an industry that needs to consolidate, and I've said that, but it's also an industry that's very difficult to consolidate."
-By Terry Kosdrosky, Dow Jones Newswires; (313) 226-1251; [email protected]
-By John D. Stoll, Dow Jones Newswires; (313) 226-1249; [email protected]
