Midwest Airlines' board yesterday said it unanimously agreed to proceed with a $16-per-share cash offer from the private equity firm TPG Capital over AirTran Airways' latest $15.75-per-share cash-and-stock proposal. Northwest Airlines is helping to finance the TPG transaction, but the carrier said it would not be involved in the "management or control" of Midwest.
Midwest said it expects to enter into a definitive deal with TPG by Wednesday.
In a letter to Midwest's board dated Aug. 12, TPG said "the proposed purchase price is an all-cash offer, which, in light of the recent volatility in the United States equity markets, represents a more certain value for your shareholders than the large stock component of AirTran's proposal."
Midwest management had been adamant about maintaining its brand as a stand-alone carrier, and the board said it concluded that the TPG offer "presented greater value and certainty for Midwest shareholders than the AirTran offer."
Northwest and Midwest plan to maintain their codeshare agreement and explore such cost-control initiatives as collective fuel purchasing. Calyon Securities analyst Ray Neidl in a research note today said Northwest's investment is less than half of the $400 million at which TPG values Midwest, but the amount of Northwest's investment is not specified.
"Northwest has a reputation for being aggressive in keeping out stronger competitors from what it considers its core territory, which includes Milwaukee and the upper Midwest region where Midwest Airlines is located," said Neidl said. "AirTran would have been a much stronger competitor to deal with than an independent Midwest."
AirTran's hostile takeover bid, initiated late last year, appeared to gain momentum in recent weeks amid shareholder pressure on a reluctant Midwest and the appointment of three AirTran-nominated members to Midwest's board. AirTran, however, allowed its latest proposal to expire, and the carrier in a statement yesterday said it had ended negotiations with Midwest.
Midwest late last month said it was exploring "financial alternatives," which included talks with AirTran as well as other undisclosed "financial parties that have recently expressed interest in pursuing a transaction with Midwest
(BTNonline, July 31)."
TPG, formerly known as Texas Pacific Group, said it has funded other carriers including Continental Airlines, America West Airlines and Ryanair. The private equity player this year also completed an acquisition of global distribution giant Sabre Holdings
(BTNonline, Dec. 12, 2006). TPG said it does not expect antitrust or other regulatory issues to threaten the closing of the Midwest deal, noting it "would be subject only to customary conditions." Calyon Securities' Neidl today said "it's possible" that TPG could be "using Midwest as a starting point" for a portfolio of small low-cost carriers.
"Private equity's role in Midwest may increase the potential for reduced capacity there, whereas the AirTran transaction seemed to offer little-to-no change in supply," said JP Morgan airline analyst Jamie Baker, noting that Midwest controls "a mere 1 percent of domestic capacity," leaving the transaction to have little industrywide impact.
Although Calyon's Neidl said Midwest would have been a valuable long-term asset to an expansionist AirTran, JP Morgan's Baker said AirTran's failure to make a deal could be a blessing for the carrier, questioning "management's ability to smoothly execute the integration of both carriers."
"Perhaps more importantly, we preferred AirTran keep its powder dry," Baker said in a research note today. "Given our increasing optimism for more meaningful industry consolidation in 2008 and 2009, more lucrative opportunities for AirTran may ultimately occur." Baker said pairings of large and small carriers—as opposed to blockbuster legacy mergers—would be the most likely deals to take shape in that time period, since such deals would face fewer regulatory and labor problems.
However, the Midwest deal is not expected to be the catalyst for further consolidation, Neidl said. "This deal would have had no effect on airline industry consolidation no matter who obtained control of Midwest," he noted today.