Northwest Airlines could eventually own Midwest Air Group

MINNEAPOLIS -- Northwest Airlines and a private equity firm expect to complete their purchase of Midwest Air Group for $450 million by year's end, but Northwest acknowledged Friday that it may one day own Midwest Airlines outright.

TPG Capital, a Texas-based private equity company, and Northwest joined forces late Thursday to outbid AirTran Airways in the competition to acquire Milwaukee-based Midwest.

But just a few hours after the Midwest board accepted the sweetened TPT-Northwest bid of $17 a share, attention shifted to Northwest possibly merging Midwest into its operations.

Rick Schifter, partner of TPG Capital, said in a Friday morning conference call that it was "contemplated that Northwest could acquire Midwest in the future."

Although Schifter said that Northwest is a minority and passive investor in the deal, he added that the agreement positions Northwest to ultimately buy TPG's stake in the company.

"That outcome is not certain," Schifter cautioned. He also noted that if it occurs, it could be "several years out."

Northwest declined Friday to specify the size of its investment in the Midwest acquisition. However, in a statement, Northwest said that it had formed a limited liability company with TPG to acquire Midwest Air Group, which operates Midwest Airlines and Midwest Connect.

"The LLC agreement gives Northwest the right but not the obligation to acquire TPG's interest in the company in certain circumstances," Northwest said. "Northwest has no current plans to exercise that right."

After TPG takes the company private, Northwest will have no right to designate board members. Northwest also said that it will "have no involvement or decision-making authority in the management of Midwest."

Bill Hochmuth, senior research analyst for Thrivent Investment Management, said Northwest has positioned itself to "bolster Northwest's network system" if it later chooses to become the sole owner of Midwest.

In the short-term, Hochmuth said, by outbidding Orlando-based AirTran, Northwest succeeded in preventing the growing, low-fare carrier from developing a strong foothold in the Milwaukee and northern Midwest markets.

Northwest controls about 18 percent of the Milwaukee passenger market, while Midwest Airlines and its regional operations, Midwest Connect, serve about 50 percent of the passengers who fly out of the Milwaukee airport.

Timothy Hoeksema, Midwest's chairman and CEO, said that Midwest and Northwest would both benefit from a code-sharing arrangement that will begin in September on select routes.

Schifter said that TPG would ultimately sell its stake in the company to Northwest or another buyer or take the company public through an initial public offering.

Schifter said that TPG and Northwest decided just a few weeks ago to explore a partnership to acquire Midwest. "We are anticipating a return on our capital that is ultimately driven by growth and profitability at the airline," he said.


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