Midwest Air deal nearly ready

The Baltimore Sun

ATLANTA -- An AirTran Airways executive said the discount carrier will continue with its ratcheted-down growth plan as a rival bigger group finishes putting together its winning bid for Midwest Air Group.

TPG Capital and Northwest Airlines Corp. emerged late Sunday with a tentative agreement to buy Milwaukee-based Midwest for $16 a share in an all-cash deal valued at more than $400 million.

The proposed takeover, which the parties expect to complete by tomorrow, would allow Midwest Airlines to remain independent.

The buyout barely beat AirTran's final offer of $15.75 a share, which the Orlando, Fla.-based carrier sweetened from $15 in last-minute bidding Sunday.

But despite the relatively small $6 million-plus difference between the winning and losing bids, AirTran President Robert L. Fornaro said his company wasn't interested in a bidding war with TPG and Northwest.

"We were not going any higher on our price," said Fornaro. "There was nothing that we saw at Midwest that would make us want to chase this thing."

Midwest's shares fell on Wall Street along with other airline stocks, despite the takeover offer.

Midwest's stock fell 23 cents to $14. Shares of AirTran, the second-largest carrier at Baltimore-Washington International Thurgood Marshall Airport, fell 38 cents to $10.32. Northwest's shares fell 22 cents to $18.30.

Fornaro predicted Midwest's sale to Northwest and TPG, formerly known as Texas Pacific Group, will likely lead to job losses and reduced competition, which could bring a challenge from federal antitrust regulators.

"Northwest will spend a lot of money to keep a competitor out of its backyard," said Fornaro.

A spokesman for Northwest said the deal is being structured so that Northwest will have no role in Midwest's management.

"We will not have any rights to control or manage Midwest in any way," said Northwest's Ben Hirst. He said Northwest entered the deal, which will allow Midwest's current management team to remain in place, to preserve an alliance with the smaller carrier.

The "code-share" agreement allows passengers to book tickets on both carriers as though they were combined.

"With our transaction, we have, if anything, preserved a competitor," he said.

Hirst declined to give specifics on Northwest's proposed stake in Midwest.

Fornaro, the AirTran president, said his company will continue with its current strategy of filling in its route network, although at a slower pace.

"I think the plan is the old-fashioned doing what we do best," said Fornaro, who expects the airline's percentage growth rate to be in the "low teens" versus 25 percent-plus in recent years.

AirTran withdrew its tender offer for Midwest late Sunday, shortly before Midwest announced that its board had unanimously approved the rival buyout agreement.

Some analysts said it's good news that AirTran failed to catch its quarry.

"We much prefer the lower-risk stand-alone strategy for now ... and questioned management's ability to smoothly execute the integration of both carriers," wrote Jamie Baker, an analyst at J.P. Morgan Securities, in a report yesterday.

Airline mergers are full of stumbling blocks. Most airlines run into trouble, industry experts say, when they blend different aircraft fleets, computer systems and work forces with distinct corporate cultures, unionization levels and work rules.

AirTran has never undertaken a big merger. The Midwest proposal would have been the first big acquisition, hostile or not, orchestrated by a major discount carrier in the United States.

AirTran argues that the proposed merger was ideal because the two carriers' route networks had little overlap, and both fly Boeing 717s, a smaller mainline jet that few other airlines use.

Baker, the Morgan analyst, suggested that it is better for AirTran to "keep its powder dry" in case better opportunities crop up, perhaps from later consolidation in the industry. He said that could open up chances for AirTran to expand at Chicago's O'Hare or New York's LaGuardia airports - both lucrative destinations favored by business travelers.

AirTran was wise to walk away rather than get locked in a bidding war, said Kevin Crissey, with UBS Securities. "This was appropriate in our view because it has become increasingly apparent that Northwest would aggressively defend Milwaukee," Crissey wrote in a report.

Northwest, whose major hubs are in Minneapolis and Detroit, is the second-largest carrier in Milwaukee, with about 14 percent of total capacity, compared with Midwest's 55 percent.

Crissey predicted that AirTran's expansion in the market would have ignited a battle with Northwest that "would likely have destroyed the revenue synergies AirTran was hoping to capture."

AirTran had projected that the merger would result in $60 million in annual savings or new revenues, partly from adding flights in Midwest's Milwaukee and Kansas City hubs.

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