How Delta Won the Fight Against US Airways

Delta Air Lines' two-month effort to present a loud, united front against a hostile takeover bid paid off in victory Wednesday.

US Airways withdrew its $10 billion merger proposal --- a deal that threatened to move Delta's headquarters to Arizona --- after Delta's major bankruptcy creditors refused to get behind the bid.

The creditors' decision came after an efficient campaign by Delta to torpedo the offer both publicly and behind the scenes.

Publicly, employee groups voiced vehement opposition through rallies and "Keep Delta My Delta" buttons. The airline also enlisted political allies who raised questions about whether a merger would survive scrutiny by federal regulators. Both tactics were designed to plant doubts in creditors' minds.

Behind the scenes, the hostile bid lit a fire under Delta's effort to put forth a stand-alone reorganization plan that the creditors would like better than the merger offer. Delta lined up $2.5 billion in exit financing from six big Wall Street firms, announcing the arrangement just 48 hours before the creditors committee had to make a decision.

Airline experts said Delta's 74-year-old chief executive, Gerald Grinstein, should get credit for rallying Delta --- riven by hard times, job cuts and executive pay controversies in recent years --- around the cause of independence.

"He's 74 years old, and maybe he'd rather be on a golf course," said Michael Boyd, president of a Colorado-based aviation consulting firm. "But he said what he meant, he wasn't evasive, and employees appreciate his candor. Despite all they've been through, their morale has seldom been higher."

The withdrawal of Tempe, Ariz.-based US Airways' bid clears Delta management to continue its plan to emerge from bankruptcy this spring as an independent airline. A court hearing on Delta's reorganization plan is set for Feb. 7 and could enable Delta to begin seeking creditors' votes for its plan.

It may not end speculation about possible mergers in Delta's future, however. Grinstein himself has said he is not opposed to all mergers, though he considered the US Airways offer fatally flawed because of the substantial overlap in the two airlines' routes.

For now, Grinstein thanked the creditors committee and trumpeted the news as a victory for workers.

"This is a proud day for the thousands of Delta people, customers, communities, civic leaders and others who stood up for our standalone plan and said, emphatically, 'Keep Delta My Delta.' " Grinstein said in a statement.

Uphill from the start

From the start, US Airways faced an uphill battle because of Delta's hostile reaction to the bid and the daunting labor and regulatory obstacles that have undermined many other proposed airline mergers.

To have a chance at pulling it off, US Airways and its 45-year-old chief executive, Doug Parker, needed to convince Delta's official creditors committee that the creditors would be better off with a merger. The court-appointed committee includes the biggest suppliers, banks and other groups with claims in Delta's Chapter 11 case, and it must approve any plan the airline submits to emerge from bankruptcy.

The committee said in a statement that in rejecting the US Airways offer it "considered a variety of factors" including the deal's value, timing and risk factors, along with the "likelihood of a successful consummation."

The committee said it plans to "work collaboratively with Delta toward confirmation and consummation" of its stand-alone Chapter 11 exit plan. A revised version of that plan will be filed this week, the committee said.

Parker said the creditors committee failed to do its job.

"We are disappointed that the committee, which has been chosen to act on behalf of all Delta creditors, is ignoring its fiduciary obligation to those creditors," he said in a statement Wednesday.

"Our proposal would have provided substantially more value to Delta's unsecured creditors than the Delta stand-alone plan. We would have created a better and more financially stable airline that offered more choice to consumers and increased job security to its employees. Our merger would have been able to be consummated in a reasonable time-frame and we would have been able to obtain all requisite regulatory approvals."

It's not known how the creditors committee voted, but a court filing Wednesday indicated that MacKay Shields, a bond firm that was one of the original nine members, had left the committee. The firm could not be reached for comment.

A second, unofficial creditor group had pushed for a deal and expressed disappointment with Wednesday's news.

Under Delta's plan, creditors will get newly issued stock when it emerges from court. US Airways' proposal would have paid a combination of upfront cash and stock in the merged carrier. Each side claimed its plan was more valuable.

Luck, timing helped

Walter Curchack, a New York bankruptcy attorney who has worked on airline cases, said Delta benefited from luck and timing as well as shrewd defensive moves. He said official creditors committee members generally have deep relationships with the company and are inclined to stick with management's plan unless things go badly sour.

"Even if the US Airways deal was better all things being equal, everything wasn't equal," said Curchack.

Delta was 15 months into its Chapter 11 bankruptcy case when the US Airways bid arrived, and its recovery plan began gaining traction last year. Delta had already reached debt-payment deals with most of its largest creditors, including several members of the committee.

"I guess you could say Delta played it well, and US Airways didn't play it as well," Curchack said. But the bottom line, he added, is "US Airways came to the party too late."

Hartsfield-Jackson International Airport has a nonvoting seat on the official creditors committee. Its general manager, Ben DeCosta, said Wednesday: "I'm feeling very good about what has occurred so far and I'm very optimistic about the future of this airline. Delta is now on the path to having adequate financing, coupled with a plan that is already working and a strategy that is winning."

Delta's pilots union, the Air Line Pilots Association has a voting seat on the committee. Its leaders have vocally opposed the merger. In a statement, the union "cautiously noted" US Airways' decision.

"The focus of the union will return to successfully exiting bankruptcy and monitoring the company's restructuring plans while also remaining attentive of any future threat," the union said.

Calyon Securities analyst Ray Neidl said Wednesday that creditors had lost confidence in Parker's predictions that he could guide the deal through antitrust review. Delta executives argued that winning such approval from the Justice Department was highly improbable, given the merger's scope and the two carriers' substantial overlap of routes. Without a good chance of approval, they argued, pursuing the US Airways offer was a waste of time and would only delay the case.

But Neidl said Delta had to give up a large degree of control to creditors to stay in the pilot's seat, noting that the airline is expected to have no "poison pill" takeover defenses when after it leaves from Chapter 11. Grinstein --- who is expected to pass the controls to a yet-unnamed successor at that point --- has denied reports that Delta has talked to Northwest Airlines about a post-bankruptcy merger.

US Airways wanted to merge the two carriers under the Delta name, creating the world's largest airline. A headquarters locale was never disclosed, but it was widely expected it would be in Arizona. That was the home of America West Airlines, which under Parker bought US Airways in 2005 and adopted the larger carrier's name.

That prospect generated many political allies for Delta.

One of the staunchest was U.S. Sen. Johnny Isakson (R-Ga.), who last year helped Delta get legislation passed that enabled it to preserve its main pension plan.

"There was no question this was a united front and our message was heard loud and clear," Isakson said in a joint statement Wednesday with fellow Sen. Saxby Chambliss (R-Ga.).

Staff writer Dave Hirschman contributed to this article.

1. Quickly finished a plan to emerge from Chapter 11 on its own, giving creditors a real alternative to the US Airways offer.

2. Drew attention to workers' opposition through rallies and 'Keep Delta My Delta' buttons.

3. Emphasized signs of progress in its recovery effort, such as worker recalls.

4. Got state and national politicians on board, raising doubts about whether federal regulators would ever approve the deal.

5. Arranged $2.5 billion in backing for its stand-alone plan, which it announced just before the creditors' decision.



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