AirTran Ups Hostile Midwest Bid

AirTran today raised its offer to $345 million for all of Midwest Air Group's outstanding shares, following last month's rebuffed $290 million offer for the carrier. Midwest management, however, has maintained a commitment to its plan as a stand-alone carrier.

Through its newly formed subsidiary Galena Acquisition Corp., AirTran would pay $13.25 per share, consisting of $6.625 in cash and .5884 shares of AirTran stock based on Jan. 8 closing prices. AirTran said the offer would expire Feb. 8 at midnight.

Much like US Airways' bid for Delta, AirTran is appealing directly to Midwest investors, foregoing direct engagement with a reluctant management team. "While we would have wished to enter into negotiations with Midwest's board and management to consummate a definitive merger agreement, it is clear that they had no intention of doing so," AirTran chairman and CEO Joe Leonard said in a statement. "Largely due to the overwhelming support we have received for the combination from Midwest shareholders, employees, customers and the communities Midwest serves, after the disclosure of our October 20th proposal, we decided to bring our offer directly to Midwest's investors."

Leonard said AirTran could grow Midwest's business and add routes to a greater degree than could the standalone carrier. "With our fleet commonality, comparable corporate cultures, commitments to quality service and complementary route networks, we are an ideal partner for Midwest," Leonard said.

Midwest, however, yesterday released its own growth plan to investors-one that has no room for a merger partner. Midwest said AirTran's initial offer "significantly undervalued Midwest and did not reflect the long-term opportunity inherent in its strategic growth plan," noting that its own business plan would offer "superior value to shareholders." The carrier intends to grow capacity 15 percent this year by expanding its fleet, adding new destinations and upping frequency on some existing routes. Midwest said its expansion plan would result in between six to 12 new destinations this year, not counting last month's five-year agreement with SkyWest to operate up to 25 regional jets for Midwest.

Calyon Securities airline analyst Ray Neidl in a research note said the deal would make sense due to complementary route networks and a common fleet that would yield cost synergies, among other factors. He said the deal would face "minimal regulatory resistance" and create a new national low-cost carrier. "We believe that the increased offer will make it more attractive to Midwest stockholders. As a result, we expect shareholders to put increasing pressure on Midwest's management."

Although Midwest could attempt to block the takeover by issuing preferred stock that would help inflate the cost AirTran would have to pay, "the chances of a deal going through are better than 50/50, in our opinion," Neidl said.