Familiar face pushes merger: Hedge fund's point man tried to unite Delta, Continental

Gordon Bethune has a knack for popping up in Delta Air Lines' affairs, even though he's never worked there. The blunt-spoken former Navy mechanic made his name 13 years ago when he led Continental Airlines' transformation from a twice-bankrupt...

If investors pressure Delta's management to look at a potential merger, "they're going to look at it," said Boyd, but he gives it low odds of happening anytime soon.

Continental did no major deals under Bethune, but he wasn't shy about engaging in talks --- or opining about why they failed.

Growing up in Texas, he dropped out of high school at 17 to join the Navy. He stayed in the service 20 years, finishing school and getting a college degree. He bootstrapped his way to the airline executive suite, starting as a maintenance manager at Texas-based Braniff. He once worked at Western Airlines with then-CEO Gerald Grinstein, who later became Delta's CEO. Grinstein gave him the nickname "Oil Can."

Under Bethune, Continental approached Delta in 1996, but then-Delta CEO Ron Allen wouldn't bite. Two years later, with Leo Mullin at Delta's helm, Delta made a merger bid that failed when Continental opted instead to sell a stake to Northwest Airlines and form a marketing alliance. It was then that Bethune said his job was saved by Mullin's "stupidity" regarding labor issues. Later, when given a chance to backpedal, he softened the term to "ignorance."

When Delta reacted to the Continental-Northwest link by seeking a similar alliance with United, Bethune quipped, "That's why ugly people always marry each other. ... There's no one left to talk to."

That alliance was later scaled back dramatically after Delta's pilots opposed it.

Bethune now says just the opposite when arguing that United and Delta should merge before some other airline steps in.

"It's like when you go to a dance and pick the prettiest girl and all the other guys get the leftovers," he said. "Why wouldn't you want to pick first?"

Bethune said he and a consulting firm hired by Pardus made presentations to roughly 100 investors and potential backers in mid-November in a New York meeting sponsored by Merrill Lynch. That was followed by smaller meetings in Boston with "a bunch of institutional [investors] like Fidelity," Bethune said.

The giant mutual fund company is Delta's third-largest shareholder, with a 14 percent stake. Pardus and dozens of other hedge funds own more than 50 million Delta shares, or about 20 percent, while institutional investors own most of Delta.

Bethune said Pardus is waiting to see what investors and the airlines' managements do. The firm says it isn't soliciting investors' votes or putting together an investor group to wage a proxy battle --- actions that would require disclosure filings with the Securities and Exchange Commission.

But the rising power of hedge funds and private-equity investors could be helping to change the dynamics in the top levels of the airline business.

Activist investors such as hedge funds flocked to Delta and other big carriers as they went through bankruptcy reorganizations. That effectively hit the reset button, pitching out much of their previous management teams, boards of directors and investor bases.

Many of Delta's current investors were also its bankruptcy creditors and got Bethune's advice on the US Airways bid last winter. US Airways' offer was "clearly a higher value" than Delta's stand-alone plan he said. But it came with higher risk, he added, because Delta's and US Airways' operations overlap extensively, which would have brought big job cuts and lots of political opposition and regulator scrutiny.

Since Delta emerged from bankruptcy in the spring, its market value has dropped substantially from management's earlier projections, Bethune said. As a result, he said, Delta's investors are "not really happy campers."

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