Airline deals could be grounded

US Air said to consider raising bid for Delta as it faces deadlines over next two weeks; talk of other deals could die if Delta avoids takeover.

By Chris Isidore, senior writer

NEW YORK ( -- Time could be running out on US Airways Group's hostile bid for Delta Air Lines and with it much of the talk about consolidation within the airline industry.

Industry experts say the recent retreat in airline stock prices, despite some strong financial results, is attributable at least partly to the growing belief among investors that the US Air (Charts) bid for Delta (Charts) isn't winning the necessary support of Delta creditors as it faces deadlines this week and next.
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And just as it was US Air's hostile bid for Delta in November that sparked talk of a round of industry consolidation involving AMR (Charts) unit American Airlines, UAL (Charts) unit United Airlines, Continental Airlines (Charts) and Northwest Airlines (Charts), many experts now believe that the merger talk will again quiet down without a US Air-Delta deal shaking up the industry status quo.

"You only have two guys, United and US Air, who are advocating consolidation," said airline consultant Michael Boyd. "Everyone else thinks it's a dumb idea. It's different if they get forced into something. But I don't think anyone else wants to do a deal."

The Amex airline index gained nearly 15 percent from the start of the year through its high Jan. 16 but has lost almost all of that gain since then.

Analyst Ray Neidl of Calyon Securities said that, just as airline stocks climbed on merger speculation and lower fuel prices, the dimmer outlook for deals is now causing stocks to give up some of those gains.

But Neidl still has "buy" recommendations on US Air as well as AMR, UAL and Continental.

"The next rally we have in late February or early March will be based on fundamentals," he said.

Thursday deadline

US Air Group, which reports its fourth-quarter results Tuesday, has given a Thursday deadline for its current $9.9 billion bid for Delta, saying the offer will expire without Delta's creditors going on record in favor of the bid and asking for a postponement of a key Feb. 7 bankruptcy court hearing on the airline's reorganization plans.

So far Delta management has flatly rejected any takeover proposal, and while an ad hoc creditors' committee has backed the idea, the formal creditors' committee, which includes the full range of Delta creditors, has yet to get behind the bid.

The Wall Street Journal reported Monday that US Air is willing to increase its hostile takeover offer for Delta Air Lines Inc. by adding $1 billion in cash under certain conditions and giving creditors a termination fee in case regulators block the deal.

A Delta spokeswoman did not have a comment on that report, and US Air spokeswoman Kelly Sullivan would not directly address it, although she also wouldn't dismiss it.

"Our advisors are in regular contact with the ad hoc committee and the advisors to the creditors' committee," said Sullivan. "We expect this will continue as the Feb. 1 deadline on our offer to continue the process approaches."

Philip Baggaley, Standard & Poor's senior airlines credit analyst, says that he's not sure even a higher bid will win much in the way of additional support from creditors for the US Air bid for Delta. Some creditors, such as airports and the Air Line Pilots Association, have an interest in seeing competing airlines remain independent, he said.

And he said bondholders, who have a more purely financial interest in the debate, may still be swayed by the argument that a US Air deal for Delta would cause too many regulatory or labor problems and hurt the value of their claims against the bankrupt airline.

"Those arguments both raise uncertainty, which nobody likes," he said. "It's not clear that changing the numbers [of that offer] would change their views."

US Air's initial bid for Delta in November valued the nation's No. 3 airline at about $8 billion in cash and stock. It raised its bid Jan. 10 to cash and stock worth $10.2 billion at that time.

But decreases in the value of US Air shares since that time have trimmed more than $250 million from the value of the offer, although US Air shares gained $2.80, or 5.4 percent, to $54.93 in trading Monday on news of the higher offer.

Bid pessimism

Neidl said the recent declines in US Airways shares before the jump Monday are at least partly a result of growing pessimism by investors about it being able to win the necessary support for its Delta bid.

"People are really doubting this deal is going to happen," he said. "The creditors are leaning away it."

Neidl said his sense is that creditors would prefer to let Delta emerge from bankruptcy as an independent carrier, something that could take place as soon as April, giving them stock in the new carrier that they can cash out in the current strong environment for airline shares.

Neidl said Delta's emergence from bankruptcy would be pushed back a minimum of six months if creditors convinced the bankruptcy court and Delta management to take the US Air offer. And antitrust regulators could delay it even longer than that, if they approve it at all.

If the Feb. 7 bankruptcy hearing is held, it will be a victory for Delta management, which hopes to win approval of its reorganization plan from the court and the creditors as soon as possible.

But Joe Capobianco, a Long Island bankruptcy and merger and acquisition attorney with Reisman, Peirez and Reisman, said he believes creditors could push Delta management to delay the hearing as a way of keeping the US Air bid alive and gaining more leverage in negotiations with Delta management.

"At the end of the day, it's up to the creditors," said Capobianco. "What's going on right now behind the scenes is all these parties are negotiating with creditors and committees to put their best foot forward and win support. If I'm representing Delta, I try to keep pedal to the metal and have the hearing as soon as possible."

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