US Air ends $10B bid for Delta

Hostile cash-and-stock offer for larger carrier withdrawn after creditors' committee fails to back it.

By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Delta Air Lines' creditors rejected the hostile takeover bid for the bankrupt airline by US Airways Group, leading the smaller rival to withdraw the bid Wednesday.

US Air announced that the creditors' committee, whose approval Delta needs to emerge from bankruptcy as an independent carrier, would not give its support to the nearly $10 billion cash-and-stock offer.

Delta Air Lines (tail in front) will apparently stay independent after its creditors rejected a hostile bid from US Airways (tail in rear).
Delta Air Lines (tail in front) will apparently stay independent after its creditors rejected a hostile bid from US Airways (tail in rear).
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"We are disappointed that the committee, which has been chosen to act on behalf of all Delta creditors, is ignoring its fiduciary obligation to those creditors," said a statement from US Air CEO Doug Parker.

Shares of US Air (up $2.21 to $55.31, Charts) lost about 2 percent immediately after the announcement, then rebounded in afternoon trading.

Delta (Charts) issued a statement cheering the US Air announcement.

"This is a proud day for the thousands of Delta people, customers, communities, civic leaders and others who stood up for our standalone plan and said, emphatically, 'Keep Delta My Delta,'" said the statement from Delta CEO Gerald Grinstein. "We appreciate the unsecured creditors committee's endorsement of our plan of reorganization."

The Air Line Pilots Association unit at Delta issued a more cautious statement on the news.

"We are one step closer to our goal for Delta to be a successful, profitable airline, but the real victory will be exiting bankruptcy," said the statement from Lee Moak, the pilots' union chief at Delta.

Grinstein had argued to creditors that Delta is set to emerge from bankruptcy court as soon as April, while he predicted federal regulators would not approve a combination of US Air and Delta, both of which have most of their operations along the East Coast.

Parker contended the deal would be approved and could be closed within four to six months of a final merger agreement. He also appeared to be signaling to creditors that US Air might raise its bid by another $1 billion in cash if they backed the offer. But it wasn't enough to convince them.

The creditors' committee issued a statement saying that the decision was based upon a number of issues, including "valuation of, the timing and the risks associated with, and the likelihood of a successful consummation of the US Airways proposal."

Experts said the regulatory uncertainty is ultimately what doomed the takeover effort.

"There was simply no guarantee if the merger would ever [have] happened, or how long it would take," said Walter Curchack, chair of the bankruptcy practice at Loeb & Loeb. "There's a lot of liquidty there for holders of the debt once Delta comes out of bankruptcy, even if all they're getting is equity."

Jim Corridore, airline equity analyst at Standard & Poor's, said he believes the creditors passed up the more valuable offer by saying no to US Air. But he said that some members of the creditors' committee had interests other than the strictly financial.

The Air Line Pilots Association, which represents Delta pilots, is on the committee, and it was strongly opposed to the deal, which it saw as hurting the interests of its members even though US Air promised the merger would not result in any layoffs. Aircraft parts makers and other suppliers who wanted to keep good relations with Delta management in the event it won its case also sat on the committee.

Other deals could be grounded, too

Many supporters and critics of US Air's bid for Delta agreed that if those carriers had merged, that could have sparked a round of consolidation among carriers including AMR Corp. (Charts) unit American Airlines, UAL Corp. (Charts) unit United Airlines, Continental Airlines (Charts) and Northwest Airlines (Charts), which like Delta is operating in bankruptcy.

Such combinations could have left about 80 percent of the nation's air travel in the hands of three much larger airlines and led to capacity reductions and fare increases in many markets.

Many analysts have said they now believe the chance of consolidation in the industry is far less likely.

"It doesn't look like any kind of consolidation will occur this year," said S&P's Corridore. "Certainly US Air could go after someone else, but nothing is imminent."

Parker agreed with that view in a conference call Tuesday, saying that it was the fact that Delta was in bankruptcy and could use that court to shed leases and contracts and create cost savings for a merged airline that made it so attractive.

He said that, even though he expects Delta to have a market value well below the US Air offer when it emerges from bankruptcy, US Air would not be interested in a bid after bankruptcy.

He said he also didn't think that there would be the round of industry consolidation that everyone was forecasting in November right after US Air made its bid for Delta.

"It's my own view that if both Delta and Northwest emerge as stand alone, I don't think you'll see consolidation in this airline industry - not until next down cycle," he said.

But Anthony Sabino, professor of law and business at St. John's University and a veteran of many other airline bankruptcy cases as an attorney, said he doesn't think Delta is closing the door on other deals.

"Just because they said no to a hostile bid, doesn't mean they'd say no to a friendly bid," he remarked. "We still don't have as clear a picture when or how Northwest will get out of chapter 11."

And he said that, while US Air has affirmed it won't bid on Delta once it's out of bankruptcy, Parker has shown he's willing to be a buyer despite the airline's being smaller than other major carriers. The $10 billion he was offering for Delta is far more than the market value of any other U.S. airline other than Southwest Airlines (Charts).

"To me, all the legacy carriers are in play," Sabino commented, referring to all the old-line carriers. "There's all sort of possibilities. They're sitting around in their war rooms consumed with this. And Doug Parker has demonstrated his mettle here."

Bankruptcy lawyer Curchack agreed this doesn't close the door to airline consolidation.

"Anytime you have an industry in the kind of upheaval that airlines have been in for so long, it's ripe for consolidation," he said.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.