Analysts Confident About Offer: Stock Market Seems Wary, but They Believe Bidder Can Close Deal

By Tom Daykin, Milwaukee Journal Sentinel

Aug. 14–For a company that just received a sweetened buyout offer, Midwest Air Group Inc.’s stock was an underwhelming performer Monday.

Some investors are concerned that the bidder, private equity firm TPG Capital, and Midwest Air might be unable to close the transaction, according to a manager at one institutional investment fund that owns a major stake in Midwest Air.

“The market is telling you to be very skeptical that this deal is getting done,” said the manager, who asked not to be identified.

Stock in Oak Creek-based Midwest Air, which announced Sunday night that it was pursuing a $16-a-share offer from an investors group led by TPG Capital, closed Monday at $14 a share, down 23 cents, in heavy volume.

That was 12.5% below TPG Capital’s offer, which will need shareholder and regulatory approval. Midwest Air’s board chose the cash bid from TPG Capital over a $15.75 stock-and-cash offer from AirTran Holdings Inc.

But a manager with another institutional investor said the spread between Midwest Air’s stock price and the TPG Capital offer was similar to spreads on other pending leveraged-buyout offers. He said those spreads reflected investors’ concerns about the tightened credit conditions pending in the capital markets and have less to do with individual concerns about the TPG Capital bid.

That fund manager, who asked not to be identified, cited payroll processing company Ceridian Corp., the subject of a $36-a-share takeover deal. Ceridian stock closed Monday at $33.01 a share.

Analyst Craig Kennison, who follows Midwest Air for Robert W. Baird & Co. in Milwaukee, cited “unsubstantiated rumors” that TPG Capital would have trouble accessing the credit markets. Kennison, however, said he believed TPG Capital didn’t need to borrow money to fund the purchase.

In a letter to the Midwest Air board, TPG Capital partner Richard Schifter says the transaction would be financed through a $15.3 billion fund managed by the company, along with contributions from “one or more partners.” Northwest Airlines Corp. has identified itself as a partner in the offer.

Another factor in the stock market’s reaction might be that TPG Capital did not have a definitive purchase agreement when Midwest Air made its announcement Sunday. Midwest Air and TPG Capital hope to have that agreement by Wednesday, said Carol Skornicka, Midwest Air senior vice president of corporate affairs.

Kennison said he believed shareholders strongly support TPG Capital’s offer because it’s higher and all cash. He said he expected Midwest Air’s stock to move closer to $16 if the definitive agreement is signed.

Antitrust worries

Some investors have been buying shares of Midwest Air. Fursa Alternative Strategies LLC, a hedge fund in Lynnbrook, N.Y., made a Securities and Exchange Commission filing, saying it now owns 5.6% of Midwest Air.

Meanwhile, the involvement of Northwest as an investor in TPG Capital’s bid has raised the specter of an antitrust challenge from the U.S. Justice Department.

Northwest would be a passive investor, with no control over Midwest Air management, Skornicka said. Neither Northwest nor Midwest Air has specified what that level of investment will be.

In an interview with WTMJ-AM (620), Skornicka mentioned that Northwest would have a 40% stake, but she said later that she had misspoken.

Midwest Air holds a 50% market share at Mitchell International Airport, and Northwest has a 19% share.

AirTran has just a small presence at the airport and has virtually no routes that overlap with those of Midwest Airlines and Midwest Connect.

Northwest’s involvement in the purchase of Midwest Air “will surely raise antitrust concerns, casting doubt for shareholders on whether a transaction can, in fact, close,” AirTran Chairman and Chief Executive Officer Joe Leonard said in a statement.

Airline industry consultants shrugged off the issue.

“I don’t see it as a big issue,” said Jay Sorensen, a former Midwest Airlines marketing manager who provides market consulting services to airlines and other clients.

2 airline turnarounds

Michael Boyd of Boyd Group Inc., a consulting firm in Evergreen, Colo., said TPG Capital’s role bolstered the bid’s credibility.

“They know the airline business,” Boyd said about TPG Capital, which is based in Fort Worth, Texas.

TPG Capital, led by David Boderman, former financial adviser to Texas oil billionaire Robert Bass, has made several lucrative investments in the airline and aviation industries.

Those included a 1993 purchase of Continental Airlines. The firm, in partnership with Air Canada, brought Continental Airlines out of Chapter 11 bankruptcy proceedings and helped drive the turnaround of the airline, bringing expanded routes and more jobs. Continental Airlines is now the fifth-largest U.S. airline.

One year later, TPG Capital and Continental brought America West Airlines out of Chapter 11. In 2005, America West merged with US Airways and adopted that name. It is now the nation’s sixth-largest airline.

The State of Wisconsin Investment Board and Northwestern Mutual Life Insurance Co. of Milwaukee have investments in the TPG Partners V fund, the entity that would actually buy Midwest Air if the deal goes through.

Northwestern Mutual Life owns less than 1% of the $15.3 billion fund, through a $35 million investment made in 2006, company spokeswoman Jean Towell said.

A spokeswoman for the Madison investment board, Vicki Hearing, said the board put $200 million into the fund last year.

John Collopy, director of research for Briggs-Ficks Securities LLC of Milwaukee, said TPG Capital was “one of the blue-chip, high-toned private equity firms.”

He said of the deal: “They will put capital in. They are not going to leave a carcass. It gives Midwest the opportunity to expand their route structure in a very measured manner.”

Avrum D. Lank of the Journal Sentinel staff contributed to this report.

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