Midwest Stands Pat, Rebuffs AirTran

April 18, 2007
Suitor won't raise bid, leaves it up to shareholders.

The battle continues.

With the board of Midwest Air Group Inc. on Friday rejecting the latest takeover offer from unwanted suitor AirTran Holdings, Midwest's future now rests with its shareholders.

An AirTran spokesman said the discount carrier from Orlando, Fla., won't increase its offer for Oak Creek-based Midwest, leaving it up to stockholders to decide who will deliver the most value.

For hedge funds and others who have bought Midwest shares since the Florida company started its campaign in December, the answer is likely AirTran.

But Midwest's management is standing firm in its contention that its vision is best in the long run, and it again urged shareholders to stay the course.

Rebuffed for the third time since December, AirTran responded by calling Midwest's directors irresponsible and derelict in their duty to shareholders and labeling Midwest management's growth plan "delusional."

Midwest said AirTran's takeover attempt is opportunistic, ignores the long-term value inherent in the Oak Creek firm and offers inadequate and uncertain compensation.

The firm also announced that it would delay its annual meeting, originally scheduled for May 11, to June 14.

On the public relations front, Midwest tapped the reservoir of hometown goodwill it has built up, launching a new section of its Web site that urges people to "save the cookie" - a reference to the chocolate-chip treats that have become the airline's de facto symbol.

Meanwhile, another shareholder suit was filed this week in federal court here, asking a judge to order the Midwest board to negotiate with AirTran. A shareholder suit filed in January in Milwaukee County Circuit Court was dropped a month later.

AirTran's offer would pay $9 in cash and 0.5842 shares of AirTran stock for each share in Midwest. At AirTran's closing price Friday, the offer would be worth $15.78 a share.

Midwest shares closed at $14.50, down 12 cents. They were trading around $9 before AirTran's bid for Midwest became public four months ago.

Earnings projection

Expressing disappointment with Midwest's action Friday, one of the company's largest shareholders urged the board to "immediately engage in a constructive dialogue with AirTran."

The stockholder, hedge fund Octavian Management, holds 1.2 million shares of Midwest, all acquired since Jan. 29 at an average price of about $13.25 each. Acceptance of the AirTran offer would give Octavian a gross gain of about $3 million.

In announcing Friday that its board was urging shareholders to reject AirTran's offer, Midwest also said it now expects to earn $1.30 to $1.50 a share this year - down from the more than $1.70 a share it projected in January shortly after unveiling its long-term growth plan.

In a statement, AirTran Chairman and CEO Joe Leonard called it "incredible" that the Midwest board would again reject AirTran when Midwest "will miss, by a substantial amount, its 2007 earnings projection put forth only a few short weeks ago."

Carol Skornicka, Midwest senior vice president of corporate affairs, said the board knew of the revised earnings estimate and factored it into its decision. The lower estimate still represents a substantial improvement, she said. Midwest earned 29 cents a share last year.

But analyst Brian Nelson of Morningstar Inc., in a research note issued Friday, said the lowering of expected earnings was "likely an indication that leadership's long-term projections are inflated and need to be ratcheted down."

Nelson said he believes Midwest is worth more as part of AirTran than as a stand-alone company. But another analyst expressed confidence in Midwest's management, saying it was "executing extremely well" and that traffic growth on the airline had been exceptional.

Chris Armbruster, a research analyst for Al Frank Asset Management, a California firm that owns 242,000 Midwest shares, said the company can prosper both on its own or as part of AirTran.

"We've held (Midwest) shares for a long time," Armbruster said. "We acquired them at what we believed to be value prices, and so we think the story has a lot more room to grow."

In early 2002, Midwest shares went for as much as $20. But the company slumped badly amid the general woes of the airline industry, and for most of 2005 the stock traded between $2 and $3.

That was when AirTran first quietly approached Midwest about a buyout. The initial offer, according to Skornicka, was $4.50 a share.

Two other analysts expect Midwest to come in either at the low end of its now-reduced 2007 earnings estimate, or not make it at all.

Craig Kennison of Robert W. Baird & Co. pegs the yearly earnings at $1.30 a share. James Parker of Raymond James & Associates estimates them at $1.23.

Meanwhile, Standard & Poor's cut its target price for Midwest to $11, saying AirTran probably won't raise its offer and that Midwest, as an independent carrier, could face stiff competition from a revitalized Northwest Airlines.

'White knight' possible?

Morningstar's research note cited the possibility that a "white knight" could emerge and engineer a friendly takeover of Midwest. The research firm pointed to Midwest's recently signed contract with SkyWest Airlines, which says the regional affiliate will buy Midwest stock if Midwest requests it.

Skornicka said that option already has lapsed without Midwest exercising it, and that the contract provision had nothing to do with AirTran's takeover bid. Another securities filing, meanwhile, shows the potential investment was $25 million - far less than the value of the AirTran offer.

The class action suit started here was filed by Market Street Securities, a Philadelphia firm that has brought similar shareholder actions against other companies.

"It's pretty standard and certainly not unexpected," Skornicka said.

Midwest got endorsements Friday from Sen. Herb Kohl (D-Wis.) and Milwaukee County Executive Scott Walker, and the company unveiled its latest tactic to rally community support - savethecookie.com.

Midwest Airlines' Sweet Plea


The Web site features a large chocolate chip cookie, long a symbol of the airline's reputation for superior customer service.

Visitors can sign a petition in support of the airline remaining independent, send a message of support to the company, share the site with another person or see highlights of an online consumer survey supporting Midwest.

The site also provides two more links: one to allow a user to make a reservation, and another to the

MySpace page of Chip, a large cookie whose introductory picture has him dressed like a mascot at a ballpark.

"My name is Chip," the character writes on his MySpace page. "People say I can be a little soft, but deep down I think I'm one tough cookie. Bad pun. Sorry. I was born in Milwaukee and raised in Kansas City. My mother was a cocoa plant and my dad was a bag of flour."

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