Northwest Gets Ready for Merger Dealing

Northwest Airlines is preparing to be a player in the merger game that many believe will define the U.S. commercial aviation industry in the next several years.

Late Thursday, Northwest asked its bankruptcy judge for permission to hire an influential investment banking firm whose financial experts have a track record for arranging airline deals.

The decision to bring in Evercore Group as a strategic adviser comes a little more than three weeks after US Airways made a hostile takeover offer for Delta Air Lines. That bid was seen by many industry observers as the opening move in a chess match that could involve most of the largest U.S. carriers -- Delta, Northwest, United, American and Continental -- and end with at least one losing its independence.

"There is a definite sense on Wall Street, and among people in the airline industry, that the time is right to consolidate," Helane Becker, an airline analyst for the Benchmark Co., said Friday.

By tapping New York-based Evercore for financial advice on possible deals, Northwest is saying: "Let's see what is out there for us," Becker said.

Northwest spokesman Bill Mellon declined to elaborate on the airline's intentions in hiring Evercore.

Darryl Jenkins, a veteran aviation consultant who has done work for Eagan-based Northwest, said the carrier made a "prudent move" in getting Evercore in its corner.

He said it allows Northwest to be ready to move on any type of deal, because Evercore and Northwest management will develop a variety of scenarios that the carrier could face.

Most simply, Northwest management could be looking for ways to fend off an unwanted offer from a rival.

The merger landscape could become even more complicated next week. United Airlines executives are hosting analysts Monday and Tuesday to discuss the carrier's plans, and Becker said she would "not at all be surprised" if United announces that it will attempt to acquire another airline.

So far, Northwest executives have been "very cagey" about their intentions, Becker said.

Northwest Chairman Gary Wilson, CEO Doug Steenland and Chief Financial Officer Neal Cohen have not granted interview requests or made any recent public comments about the merger speculation in the industry.

Instead, they've decided to align themselves with some financial heavyweights. The chairman of Evercore is Roger Altman, who was deputy Treasury secretary in the Clinton administration. Evercore executives have participated in many airline bankruptcy cases, including Continental, United and Eastern airlines.

United Airlines has retained Goldman Sachs to give it merger advice.

"Everybody is trying to find out who their dance partner is going to be," Jenkins said.

In its proposed contract with Evercore, Northwest would provide multimillion-dollar paydays to the financial firm at critical junctures. The agreement also explicitly says that Northwest currently contemplates leaving bankruptcy as a standalone company.

Evercore would get $3 million if Northwest emerges from bankruptcy. It would be paid $2 million for work that culminates in a merger or another key transaction involving Northwest. In the meantime, Evercore would get a $275,000 upfront fee and a $75,000 monthly fee afterward.

Both stock and bond investors are betting heavily on Northwest being involved in a deal.

Northwest's stock closed Friday at $4.90 per share, up 48 percent, after heavy trading. Northwest bonds due to mature in March 2008 closed Friday at 84.12 cents for every dollar in face value; in May, the same bonds fetched just 43 cents on the dollar.

As recently as September, Northwest stock traded for less than 50 cents a share. The stock has climbed steadily since the news of US Air's bid for Delta in mid-November. The common stock is last in line to receive any value in a bankruptcy, and Northwest has said it believes the shares will be left worthless once its reorganization is complete. In that case, a buyer would have to emerge for Northwest to justify the current prices at which its stock is trading now.

"The activity that we are seeing in Northwest stock is a clear indication that people are expecting more consolidation in the airline industry," with some concluding that Northwest is a "target," said Rajesh Aggarwal, an associate professor of finance at the University of Minnesota.

Northwest has said it plans to emerge from bankruptcy during the first half of 2007. Northwest last pulled off a merger 20 years ago when it acquired Republic Airlines.

Jenkins, the aviation consultant, said he can't see Northwest bidding for Delta, which also is in bankruptcy, at this time.

"Right now, they don't even have money to come out of bankruptcy yet, let alone go out and buy somebody," he said.

But if the US Airways-Delta deal falls apart, Northwest management ultimately might attempt to put together its own offer for Delta -- long considered by many analysts as a good fit with Northwest because each is strongest in different U.S. and foreign markets.

Phil Baggaley, a Standard & Poor's analyst, believes Northwest is in a better position to fend off any unwanted offers than Delta.

"Northwest may have a greater ability to resist a hostile bid than Delta given how they have been performing [financially] and how far along they are" in restructuring their costs, he said.



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