United, Delta Air deny bid to merge

The Baltimore Sun

A major shareholder of United Airlines and Delta Air Lines wants the two carriers to merge, an idea that in principle is appealing to both sides and appears to have led to informal talks, though both sides deny that a deal is being negotiated.

Hedge fund Pardus Capital Management LP set off fireworks yesterday after it sent a letter urging Delta's management to pursue a merger with United's Chicago-based parent company, UAL Corp., or risk returning to bankruptcy.

The news sent the airlines' shares soaring, as did rumors that negotiations were under way - speculation that the airlines quickly squelched.

But sources said that principals at Pardus, which has a track record of activism, have been informally discussing the benefits of mergers with the two carriers and other industry players this fall, as airlines' stocks have languished and oil prices approached the $100-a-barrel level.

Although it holds 4.8 percent, or 5.6 million shares, of United worth $222 million, and 3 percent, or 7 million shares, of Delta stock worth $137 million, Pardus isn't in a position to broker the numbingly complex deal that a major airline merger would entail, sources said. That's work that would have to be handled directly by the carriers.

By going public with its concerns about high oil costs and its merger analysis, Pardus increased pressure on Delta, United and other U.S. airlines to seriously consider striking deals or devising other strategies to deal with deteriorating conditions that threaten the airlines' nascent financial recoveries.

"Whether this one is real or not, the conversation begins in earnest," said longtime aviation observer William Swelbar, a research engineer with the Massachusetts Institute of Technology's Center for Air Transportation. "The catalyst has been revealed: the price of oil."

New York-based Pardus and Karim Samii, its president and chief investment officer, are known for speaking up when management teams don't deliver. In 2006, Pardus helped oust the chief executive of Chicago's Bally Total Fitness, which later sought bankruptcy protection.

"They're very capable; they aren't sinister," Chicago restructuring expert William Brandt said of Pardus. "But obviously for them, it's about making money and a return on their investment."

The management teams of United and Delta are vocal proponents of industry consolidation and merger rumors involving the two carriers have surfaced periodically over the past decade, most recently in August.

Glenn F. Tilton, United's chief executive, told the Chicago Tribune last month that he believes United needs a large-scale merger to remain a global player.

Delta's strong Atlanta hub, rich European and Latin American network and base at New York's John F. Kennedy International Airport are thought to fit well with United's fortress hub at Chicago's O'Hare International Airport, its dominating position across the North Pacific and rich route network across the western United States.

Pardus, which hired former Continental Airlines CEO Gordon Bethune as an adviser and market research firm Simat, Helliesen & Eichner to evaluate potential deals for Delta, estimates that a tie-up with United would produce about $585 million in "synergies."

Delta made clear yesterday that it wasn't completely opposed to the idea of a merger, having already formed a board committee to review possible deals.

"Delta believes that the right consolidation transaction could generate significant value for our shareholders and employees, and that strategic options should be evaluated," Delta CEO Richard H. Anderson said.

Julie Johnsson writes for the Chicago Tribune. Tribune reporter Ameet Sachdev contributed to this article.

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