US Airways & Delta Buyout Analysis

US Airways Group Inc offered an $8-billion takeover of bankrupt Delta Air Lines Inc on November 15 in an attempt to restructure costs and get the most out of a sector showing signs of recovery. Delta is the No. 3 US airline. According to US Airways, the deal would create the No. 1 trans?Atlantic carrier. The deal is the latest move by US Air CEO Doug Parker, who planned the May 2005 takeover of the then-bankrupt US Air by financially-healthier America West. Parker has proposed becoming the CEO of a merged airline.

A spokeswoman of Delta said that Delta intends to emerge from bankruptcy as a stand?alone carrier. “Maybe US Airways did a pre-emptive strike here,” Calyon Securities’ Ray Neidl said. “The big concern is government regulators, if they give the green light. And if they do, it will probably set off a series of potential M&A activity in the industry.”

Delta creditors would get $4 billion in cash and 78.5 million shares of US Air stock with an aggregate value of $4 billion based on closing stock price on November 14. CreditSights analyst Roger King said, “This appears to be sort of a hostile takeover. Delta CEO Grinstein has made it clear that he doesn’t want to merge. But US Airways is appealing directly to the creditors.” Industry leaders such as UAL Corp CEO Glenn Tilton and Parker have been outspoken proponents of consolidation. They both have approached Delta in the past for a merger.

US Air announced its offer represented a 25% premium over the current trading price of Delta’s pre-petition unsecured claims as of November 14. The offer also represented 40% premium over the average trading price for Delta unsecured claims over the last 30 days.
While Delta stock is considered of modest value, creditors claims have monetary value and can be traded by investors. US Air thinks the combination will generate at least $1.65 billion in annual synergies.