US Airways Goes Full-Throttle in Delta Bid

Shares of US Airways Group (LCC) soared Nov. 15 after the company announced an $8 billion offer to acquire bankrupt carrier Delta Air Lines (DALRQ.PK). US Airways is seeking support for the deal from investors, after an earlier overture had been rebuffed by Delta’s CEO Gerald Grinstein.

The Tempe [Ariz.]-based US Airways announced Nov. 15 that it would pay $4 billion in cash and issue 78.5 million shares of US Airways stock to Delta’s creditors, in an effort to create a larger airline that would operate under Delta’s name and serve more than 350 destinations across five continents.

After the news, U.S. Airways’ stock surged 13.5% to $57.81 per share on the New York Stock Exchange on Nov. 15.

“The combined company will be a more effective and profitable competitor in the current fragmented marketplace,” US Airways chairman and CEO Doug Parker said in a press release. Parker thinks a combination would generate at least $1.65 billion in annual synergies from things like improved efficiencies. He says the opportunity to generate more than half of these synergies could be lost if a merger is delayed until after Delta emerges from bankruptcy.

The Atlanta-based Delta is in bankruptcy after having buckled under pressures during recent years such as a post-September 11 air travel slump and sky high fuel prices. It continues planning to emerge in the first half of 2007 as a stand-alone carrier.

“We received a letter from U.S. Airways this morning and will of course review it,” Grinstein said in a statement.

Parker already got a financing commitment from Citigroup to provide $7.2 billion in new financing for the deal he proposes.

“Delta creditors will receive significantly greater value under this proposal than they would under any standalone plan for Delta,” Parker says.

The company is offering to pay a 40% premium over the average trading price for Delta unsecured claims over the last thirty days as of Nov. 14.

“Delta will face a lot of pressure from the creditors’ committee to do this,” says Standard & Poor’s equity analyst Jim Corridore. [S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.] He thinks approval of the deal by the necessary parties — Delta, regulators, creditors, and the U.S. Bankruptcy Court — is likely. If Delta does not agree, US Airways could still win approval from creditors, he says.

Parker has already tried to convince Delta to agree to a merger and wrote a letter to Delta’s CEO Gerald Grinstein dated Nov. 15 describing his recent efforts. He had talked with Grinstein about a potential merger in spring, only to receive an official rejection in a letter dated Oct. 17 even to discuss the idea.

“Because the benefits of a merger of US Airways and Delta are so compelling to both of our companies’ stakeholders, we believe it is important to inform them about our proposal. Therefore, we are simultaneously releasing this letter to the public,” Parker said in his recent letter.

Parker already has a vote of confidence from PAR Capital Management, US Airways’ largest shareholder. “We enthusiastically support this transaction, which we believe offers the opportunity to build upon US Airways’ current competitive position,” Paul Reeder, PAR’s president, said in a press release.