NWA Still Needs to Fill in Blanks

Jan. 13--Northwest Airlines filed a bare-bones bankruptcy reorganization plan on Friday that intensified merger speculation.

The plan calls for the airline to give its unsecured creditors stock in a new company and to raise capital from investors, including private equity investors. However, creditors would not be repaid in full, which means that all of Northwest's existing common shares would be wiped out when the company emerges from bankruptcy.

It's what's omitted that is raising eyebrows.

The 66-page filing omits a disclosure statement that typically accompanies a reorganization plan and contains details such as a business strategy, valuation of the company, financial projections and the percentage of new stock that will go to each class of creditors.

Bankruptcy experts say it looks like Northwest, the nation's fifth-largest carrier, is playing for more time -- either to continue merger discussions or to fine-tune the financial details to ensure support from creditors.

"Something big is cooking out there or they're anticipating that something is going on that would impact the disclosure statement," said Anthony Sabino, professor of business law at St. John's University in New York, who worked on Eastern and Continental airlines' bankruptcy cases in the 1990s. "This step today doesn't quell the rumors but pours gasoline on them. There'll be rampant speculation over the weekend and rightly so."

Merger scenarios abound in the airline industry right now. Eagan-based Northwest and Atlanta-based Delta Air Lines reportedly have talked about a merger after they both exit bankruptcy reorganization. Both airlines, which filed for bankruptcy protection on the same day in September 2005, have declined to comment.

Delta is fending off a hostile takeover by US Airways, which intensified this week with an enriched $10 billion offer. A major deal could trigger other combinations, and just about every major airline is said to be weighing options. Northwest also is in the process of buying its regional partner, Mesaba Airlines, in a much smaller deal now valued at about $145 million.

Northwest's plan filed Friday does not mention Delta. It refers to a "merger" once: Restrictions on the transfer of stock in the new company would not apply in certain transactions, such as "a merger or consolidation."

The bankruptcy court, with the consent of the committee of Northwest's unsecured creditors, gave the airline until Feb. 15 to file the disclosure statement. The extension will delay the process because Northwest can't start seeking the approval of creditors until the court approves the statement. Northwest maintains that it plans to exit bankruptcy court protection by the end of June.

Legal experts said filing a plan without the disclosure document doesn't make much sense because it's short on details and doesn't provide a value of the airline to creditors. Thomas Salerno, chairman of Squire, Sanders & Dempsey's bankruptcy reorganization practice in Phoenix, called it a "placeholder plan" -- an insufficient document that simply shows progress is being made.

Brett Miller, a lawyer for Northwest's creditors committee, declined to comment on the plan.

Northwest Chief Executive Doug Steenland said Friday in a statement that the airline has cut $2.4 billion in annual costs in the past 16 months and is on track to report a pretax profit for 2006.

Before filing for bankruptcy, Northwest had posted more than $4 billion in losses since 2001.

Northwest plans to raise capital by offering common stock to investors at a discounted price and from private equity investors. The airline also said it could convert its existing bankruptcy debt into exit financing, which would consist of a $175 million revolving credit line and a $1.05 billion loan.

The plan also allows Northwest's board of directors, which likely will include new members, to appoint company officers after emerging from bankruptcy.

Once Northwest files the disclosure statement, creditors will have a certain amount of time to respond. The plan must be approved by two-thirds of the total dollar amount of claims for each class of unsecured creditors and a majority of the number of creditors. The bankruptcy court must give its final approval.

One potential obstacle: unhappy shareholders.

Although the plan calls for them to receive nothing in the bankruptcy reorganization, a number of shareholders claim Northwest is undervaluing itself. One group of shareholders that own 18.5 percent of Northwest stock said in court documents filed Thursday that shares in a reorganized airline could be worth at least $17.30 each. Another shareholder last month said such shares could be worth as much as $33.50 apiece if Northwest merges.

Northwest shares on Friday fell nearly 13 percent, to $4.83.

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