Midwest Acquisition is Still Up in the Air: AirTran May Want Negotiations Under Way Before Sweetening Its Offer, Analysts Say

By Tom Daykin, Milwaukee Journal Sentinel

Jan. 5–AirTran Holdings Inc.’s attempted acquisition of Midwest Air Group Inc. remains stuck in a holding pattern, with AirTran unlikely to sweeten its buyout offer unless it can persuade Midwest to enter into negotiations. That’s the view of industry analysts contacted this week, following a lull over the Christmas and New Year’s holidays. The last significant news in AirTran’s takeover campaign came just before Christmas, when Oak Creek-based Midwest Air, owner of Midwest Airlines, hired investment banker Goldman Sachs to provide strategic advice. AirTran Holdings, owner of AirTran Airways, isn’t expected to immediately boost its offer of $11.25 a share, said Helane Becker, an analyst with New York-based Benchmark Co. Becker and other analysts said they didn’t expect other airlines to bid on Midwest. AirTran is the most likely buyer for Midwest, they said, because both airlines rely heavily on the same aircraft and have little overlap on the routes they fly. So, raising the offer would amount to AirTran bidding against itself, Becker said. Midwest Air Chairman Timothy Hoeksema has said AirTran’s offer of $290 million is too low, but that Midwest’s board would carefully evaluate any new, credible offer. AirTran Chairman Joe Leonard has said his company would be willing to pay more if Midwest would agree to provide proprietary financial information to show any additional value. That proprietary information would include details on the profitability of individual Midwest routes, said Brian Nelson, an analyst with Morningstar Inc., a Chicago provider of independent investment research. Otherwise, AirTran “wouldn’t have a basis to hike its offer,” he said. Nelson said he believes a sale of Midwest to AirTran will happen eventually. Midwest stock, which closed down 9 cents Thursday at $11.57 a share, has generally been trading above $11.25 since Midwest announced its hiring of Goldman Sachs. That suggests that investors believe the company will be sold to AirTran at a price higher than the original offer, Nelson said. “This deal looks like it’s going to get done, one way or another,” Nelson said. AirTran’s strategy of going public with Midwest’s rejection of its purchase offer has not generated enough shareholder pressure to force Midwest to negotiate with AirTran, said Craig Kennison, an analyst with Milwaukee-based Robert W. Baird & Co. AirTran would need to sweeten its offer to get Midwest to open its books, Kennison said. Even if that happens, though, he doubts AirTran would discover much additional value. “The discussion of opening its books is simply an element of the negotiation process,” Kennison said. “It’s like selling a home. Once you start talking about who keeps the appliances, the buyer knows he has a deal. If the parties are too far apart, it doesn’t make sense to talk appliances.” AirTran continued its public campaign this week. The Orlando, Fla.-based airline bought another full-page advertisement in the Journal Sentinel to press its case that the merger would be good for shareholders, employees and customers of both AirTran and Midwest. Also, AirTran is sending letters from Leonard to the CEOs of several major Milwaukee-area companies touting the benefits of the merger, company spokesman Tad Hutcheson said. Leonard says AirTran would guarantee jobs for virtually all Midwest employees, with the exception of top executives. He also says AirTran would add flights from Mitchell International Airport, and bring lower fares for passengers flying from Milwaukee. Hoeksema is dubious of those claims, questioning whether Milwaukee can sustain a major expansion. He says Midwest’s growth plan, which includes a regional jet service that launches in April, provides Midwest with a “significantly higher” value than the AirTran offer. AirTran also generated headlines when it disclosed in a securities filing late Wednesday that it expects a “modest loss” in the fourth quarter, while reporting a profitable 2006. AirTran’s stock closed Thursday at $11.89, down 17 cents. Meanwhile, Goldman Sachs is working up a detailed study of Midwest, including an updated valuation of the airline and strategic options to help Midwest maximize shareholder value, said Carol Skornicka, Midwest senior vice president of corporate affairs. It’s too early to say what might happen once that process is completed, she said. “I think everybody recognizes something is going to happen,” Skornicka said. “We just don’t know what.”

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Copyright (c) 2007, Milwaukee Journal Sentinel

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