AirTran scales down growth plan

Airtran Airways President Bob Fornaro said Monday the discount carrier will continue with a ratcheted-down growth plan after a bigger rival outbid it for Midwest Airlines.

TPG Capital and Northwest Airlines emerged late Sunday with a tentative agreement to buy Milwaukee-based Midwest for $16 a share in an all-cash deal valued at more than $400 million.

The proposed buyout, which the parties expect to finalize by Wednesday, would allow Midwest Airlines to remain independent.

The buyout barely beat AirTran's final offer of $15.75 a share, which the Orlando-based discount carrier sweetened from $15 in last-minute bidding Sunday.

But despite the relatively small $6 million-plus difference between the winning and losing bids, Fornaro said his company wasn't interested in a bidding war with TPG and Northwest.

"We were not going any higher on our price," said Fornaro. "There was nothing that we saw at Midwest that would make us want to chase this thing."

Midwest's shares' fell Monday on Wall Street along with other airline stocks, declining 23 cents to $14. AirTran's shares fell 38 cents to $10.32, and Northwest's shares fell 22 cents to $18.30.

Fornaro said Midwest's sale to Northwest and TPG, formerly known as Texas Pacific Group, will likely lead to job losses and reduced competition, which could bring a challenge from federal antitrust regulators.

"Northwest will spend a lot of money to keep a competitor out of its backyard," said Fornaro.

No management control

A spokesman for Northwest said the deal is being structured so that Northwest will have no role in Midwest's management.

"We will not have any rights to control or manage Midwest in any way," said Northwest's Ben Hirst. He said Northwest entered the deal to preserve an alliance with the smaller carrier. The "code-share" agreement allows passengers to book tickets on both carriers as though they were combined.

"With our transaction, we have, if anything, preserved a competitor," Hirst said.

He declined to give specifics on Northwest's proposed stake in Midwest.

TPG has a long history investing in the airline industry. The firm took stakes in Continental and America West airlines during their restructuring efforts in the 1990s. TPG was more recently involved in attempts to buy Qantas Airways in Australia and Alitalia in Italy. TPG is currently involved in a takeover play for Spanish airline Iberia.

Industry experts suggested that TPG and Northwest showed up with billions of dollars in potential ammunition just as AirTran was nearing the limits of its bid. TPG said its investment fund involved in the transaction has $15.3 billion in capital. Northwest, which recently emerged from bankruptcy, reported $3.3 billion in unrestricted reserves at the end of June.

If AirTran tried to match TPG's all-cash offer, it would have had to come up with more than $170 million in cash in place of its offer: $9.50 cash and 0.5842 of an AirTran share for each Midwest share.

Fornaro said AirTran will continue with its current strategy of filling in its route network, although at a slower pace.

"I think the plan is the old-fashioned doing what we do best," said Fornaro, who expects the airline's percentage growth rate to be in the "low teens" vs. 25 percent-plus in recent years.

AirTran withdrew its tender offer for Midwest late Sunday, shortly before Midwest announced that its board had unanimously approved the rival buyout agreement.

Some analysts said it's good news that AirTran failed to catch its quarry.

"We much prefer the lower-risk stand-alone strategy for now ... and questioned management's ability to smoothly execute the integration of both carriers," JPMorgan analyst Jamie Baker said Monday in a report.

Indeed, airline mergers are full of stumbling blocks. Most run into trouble, industry experts say, when they blend differing aircraft fleets, computer systems and work forces with distinct corporate cultures, unionization levels and work rules.

No track record

Also, AirTran has never handled a big merger. In fact, this would have been the first big acquisition, hostile or not, orchestrated by a major discount carrier in the United States.

But AirTran argued that the proposed merger was ideal because the two carriers' route networks had little overlap, and both fly Boeing 717s, a smaller mainline jet that few other airlines use.

Baker, however, suggested that it is better for AirTran to "keep its powder dry" in case better opportunities crop up, perhaps from later consolidation in the industry. He said that could open up chances for AirTran to expand at Chicago's O'Hare or New York's LaGuardia airports --- both destinations favored by lucrative business travelers.

AirTran was wise to walk away rather than get locked in a bidding war, said Kevin Crissey, with UBS Securities. "This was appropriate in our view because it has become increasingly apparent that Northwest would aggressively defend Milwaukee," Crissey said in a report.

Crissey predicted that AirTran's expansion in the market would have ignited a battle with Northwest that "would likely have destroyed the revenue synergies AirTran was hoping to capture."

GUNNING FOR MIDWEST

OCTOBER 2006

* AirTran CEO Joe Leonard meets with Midwest CEO Tim Hoeksema and offers to buy the Milwaukee-based carrier.

DEC. 7, 2006

* Midwest's board formally rejects the AirTran offer.

DEC. 13, 2006

* AirTran publicly launches a hostile bid for Midwest at $11.25 a share, or $288 million, a 24 percent premium at the time. Midwest later rejects the offer as "inadequate and opportunistic."

JAN. 11, 2007

* AirTran raises its offer to $13.25 a share, or $345 million. Midwest rejects the sweetened bid.

APRIL 2

* AirTran boosts its offer to $15 a share, or $389 million, and says it won't raise it again, setting an Aug. 10 deadline.

MAY 16

* AirTran gains the support of 57 percent of Midwest shareholders, but Midwest retains the right to use Wisconsin anti-takeover laws to block a transaction.

JUNE 14

* A majority of Midwest's shareholders elect three AirTran-backed directors to Midwest's nine-member board, opening cracks in the airline's resistance to a deal.

JULY 16

* AirTran's top brass presents its merger case to Midwest's new board, which doesn't take any immediate action.

JULY 31

* Midwest's board begins talks with AirTran and three unidentified potential bidders.

AUG. 10

* As AirTran's deadline looms, Northwest Airlines is reported to be a partner in an investor group that wants to buy Midwest and keep it independent.

AUG. 12

* AirTran boosts its offer to $15.75 a share, but pulls the plug later that day. Midwest announces a tentative deal with TPG Capital, a private equity firm that has invested in Continental and other airlines. Northwest confirms it will be a "passive" investor in Midwest.

--- Staff research


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