Merger talk flies around Delta

Like a wild day on Wall Street, the fate of one of Atlanta's biggest employers appeared to change by the minute Wednesday.

Fueled by news of a letter from a hedge fund, Delta Air Lines went from potential acquirer of one of its biggest rivals, United Airlines, early in the day to possibly being absorbed by the Chicago-based company.

By the close of the stock market, both United and Delta officials were denying that any merger talks were taking place --- and politicians and economic development officials in both cities were trying to figure out whether they will have to prepare for an all-out campaign to keep the hometown airline.

Still, a few things are certain:

* New York-based Pardus Capital Management, like many on Wall Street, wants Delta to merge with another carrier --- preferably United --- to improve its financial prospects in a chronically turbulent industry.

* Delta and United also want to see consolidation.

* All say such giant mergers are fraught with risks --- from mismatched fleets and computers to potentially hostile employees, politicians and regulators --- that reduce the odds of their becoming reality.

The merger speculation started when it was disclosed that Pardus had written Delta, urging the carrier to negotiate a stock-for-stock merger with United. The New York firm, which owns 7 million Delta shares (2.6 percent) and 5.6 million United shares (4.8 percent), said it would also support Delta CEO Richard Anderson as the head of the combined company, the New York Times reported in its online story.

Delta executives, while saying no talks were in progress, initially said they "appreciate receiving Pardus' views." Delta also said it had hired financial and legal advisors and created a subcommittee of its board of directors to look at "strategic alternatives" --- often code words for plans to begin talks to buy or sell a company. Delta said it took those measures before getting Pardus' proposal.

Later Wednesday, however, Delta tried to tamp down the merger speculation after some news outlets reported that the two airlines were rushing merger talks to create a Chicago-based carrier that would be called United, in time for the Bush administration to complete an antitrust review before it leaves the White House in early 2009.

"Somebody's making that up. That's just flat-out untrue," Delta President Ed Bastian said in a second interview Wednesday after merger speculation swept through the financial news media. "There's absolutely no discussions going on, either formal or informal, with any carrier."

Other than informal talks Delta had early this year with Northwest Airlines, Bastian denied that the Atlanta-based carrier is now or has been in merger talks with United. Still, he said Delta is open to the "right deal" to take over another carrier.

United also denied the reports, but indicated that it, too, thinks mergers are inevitable.

"We do not respond to wholly inaccurate statements made by people who claim to have knowledge when they clearly do not," said United spokeswoman Jean Medina in an e-mail.

"We have said for the last four years that we believe consolidation is necessary for the industry, and others independently are reaching the same conclusion," she said. "We make decisions in the best interest of United, and we don't comment on the opinion of one shareholder, or the actions or hypothetical transactions proposed by others."

U.S. Sen. Johnny Isakson (R-Ga.) said Wednesday he was personally given assurances by Delta's Anderson that he would only back a merger if "Delta is the survivor" and the carrier continued to be based in Atlanta.

Isakson, a leading voice on aviation during his time at the Georgia General Assembly, the U.S. House of Representatives and now in the U.S. Senate, said he invited Anderson to his office Wednesday to discuss rumors that Delta and United were in merger talks.

Anderson has denied the two are in any active talks, and Isakson said news reports surfaced Wednesday because hedge funds heavily invested in the airlines "floated a letter [speculating about a merger] for a quick hit."

The two men met for about 30 minutes, Isakson said. Anderson was in Washington to prepare for testimony at a House subcommittee hearing Thursday about airline preparations for the holiday travel season.

"Richard said, 'We want Delta in Atlanta. We want Delta to be the surviving airline. We want the employees to be for it. And that's the only way it will end,' " Isakson said.

Pardus couldn't be reached for comment.

The firm said in the letter that it identified $585 million in annual savings the two airlines could realize from a merger transaction through a stock swap, The New York Times and Dow Jones reported online Wednesday. The reports did not specify how those savings would be achieved.

"We have no negotiations ongoing," said Bastian in an interview early Wednesday, but he added that the rise of crude oil and jet fuel prices to near-record levels "changes the model" and that Delta will consider a merger in which it emerges as an acquirer and that adds no debt. Without talking specifically about a deal with United, he said a merger could help Delta round out its route network in Asia, where it has little presence.

Industry experts say the two airlines have complementary networks --- Delta is strong on the East Coast and in Europe --- but that such a merger would be difficult and could face a challenge from politicians, employees and antitrust regulators. United's work force is largely unionized, while only Delta's pilots are in a large union, raising additional complications.

The two airlines would have combined revenues of roughly $37 billion, dwarfing the current industry leader, American Airlines, with about $23 billion.

Vaughn Cordle, senior analyst at Airline Forecasts in Washington, said regulators at the federal Department of Justice could take a year or longer to review such a huge merger proposal.

"Big mergers may not be possible regardless of what some executives and industry analysts say," he said.

Still, people on Wall Street have long been eager to see consolidation among airlines, which have been unprofitable more years than not. Most airlines have reported healthy profits this year after Delta and Northwest slashed capacity, debt and other costs in bankruptcy reorganizations that ended this year. However, crude oil prices that skyrocketed past $90 a barrel, taking jet fuel prices with them, have threatened to scuttle the industry's recovery.

Delta's Anderson said in a statement, "We appreciate receiving Pardus' views on the best course for Delta's future. ... We have been consistent in our public statements that Delta believes that the right consolidation transaction could generate significant value for our shareholders and employees and that strategic options should be evaluated. With oil at over $90 a barrel, this analysis takes on a heightened importance as we factor those prices into our long-term planning process."

Meanwhile, Dow Jones reported that United and Delta have been discussing a combination that would keep the United name on the merged carrier with a corporate headquarters in Chicago. The Associated Press, citing an unnamed source, said the carriers have been in talks for some time, including in the last week or so, and hope to reach a deal soon so that federal regulators can consider it before a new administration enters the White House. Delta's shares rose 4 percent to $19.52 and United's shares rose 1.5 percent to $44.17, after both rose about 6 percent in afternoon trading.

Delta vigorously fought off a $10 billion takeover offer from US Airways earlier this year as it was headed into the late stages of its 19-month-long restructuring in Chapter 11. A massive grass-roots campaign in which employees rallied and wore buttons with the slogan "Keep Delta Our Delta" at work and to a congressional hearing helped Delta outmanuever US Airways.

Still, Delta's stock has declined significantly since it emerged from Chapter 11 last spring and never matched the market value the airlines' management projected for its plan to remain independent rather than merging with US Airways, angering creditors who favored a merger.

Staff writer Jim Tharpe contributed to this article.