US Airways turns to Delta's creditors

| Sunday, Nov. 19, 2006

US Airways' unsolicited offer to acquire Delta Air Lines for $8.6 billion is shifting to a full bankruptcy-court press.

With Delta management resisting the cash-and-stock bid, US Airways is appealing to the bankrupt carrier's creditors. They are owed approximately $16 billion.

The creditors' committee will have the most say in how Delta reorganizes in bankruptcy -- via management's stand-alone plan, US Airways' merger offer, or even a competing merger bid that's likely to emerge.

"It seems US Airways wants to hop over Delta and start communicating directly with the creditors," said Kitt Turner, attorney and head of the bankruptcy and creditors rights practice at Eckert Seamans Cherin & Mellott, a Downtown law firm. "

"US Airways hopes this will put pressure on the creditors committee to exert pressure on Delta's management," Turner said.

US Airways says its offer means creditors would receive about 40 cents for every $1 they are owed. Some outside estimates place the rate closer to 50 cents. Recouping even 40 percent is higher than in most commercial bankruptcies.

Atlanta-based Delta is formulating a final reorganization plan to submit to the bankruptcy court. It will hear no other plan until Delta has presented its own.

Aside from weighing which plans repay creditors the most money, many will try to decipher which plan best assures Delta will survive long term. Creditors must decide if the merger bid from US Airways, or any other carrier, would pass government antitrust scrutiny.

Industry watchers say US Airways' offer could spur bids from competitors. Most often mentioned are United and Northwest airlines. "This might trigger a wave of consolidation in the industry," Turner said.

Delta filed a Chapter 11 petition to reorganize in federal court in New York on Sept. 15, 2005. That was one day before US Airways' own, final bankruptcy hearing before exiting and merging with America West Airlines. Since then, US Airways has been integrating systems and contracts with America West's.

Last spring, US Airways CEO Doug Parker privately wrote Delta CEO Gerald Grinstein to discuss another possible merger. Grinstein wrote Parker on Oct. 17 that such talks "would not be productive," say securities documents. Finding no receptive ear at Delta, Parker on Nov. 15 announced US Airways' offer, which is backed by a loan package from Citigroup.

"We're still hoping to meet with both management and the creditors' committee as soon as possible, to talk to them so they understand the value of the bid to Delta's constituencies and to ours," said US Airways spokeswoman Andrea Rader.

No such meetings were set as of late Friday, she said.

Delta could not be reached for comment. The airline has stated that it will examine US Airways' offer.

"Delta management has an obligation to act in the best interests of creditors and the (corporation)," said Eric Schaffer, a veteran bankruptcy attorney at Reed Smith, a Downtown law firm. "And when someone offers $8 billion, you can't just ignore it."

"Management might be convinced their stand-alone plan is better, but they will have to take US Airways' proposal seriously and have financial advisers examine it," said Schaffer, who represented trustees of Philadelphia International Airport bondholders in US Airways' first bankruptcy in 2002.

How the Delta drama will turn out is tough to predict because the circumstances are rare, say experts.

"We've almost never had hostile takeovers in bankruptcies. This is pretty unusual," Turner said.

Delta has said it hopes to emerge from bankruptcy in the first half of next year, possibly as early as April. That's why US Airways is pressing hard.

US Airways' bid estimates that with the aid of bankruptcy powers to cancel Delta leases and contracts, the two airlines could find "synergies" -- cost cuts and new revenue -- totaling $1.65 billion a year.

"Half of the synergies would be lost if we did this deal after Delta emerges from bankruptcy," Parker told Wall Street analysts on Thursday.

The bankruptcy court gave Delta the exclusive right to submit a bankruptcy reorganization plan through Feb. 15. But it's likely Delta will seek and receive an extension, if the judge believes Delta's reorganization is progressing, Schaffer said.

"If the bankruptcy creditors committee believe Delta management is not giving US Airways' proposal appropriate attention, it could ask the court to terminate Delta's exclusive right to submit a plan of reorganization," Schaffer said. "But that doesn't happen too often."

US Airways' bid also would be scrutinized by Department of Justice antitrust regulators. Industry analysts who give the bid mixed chances of succeeding agree the two airlines have market concentration issues in the eastern United States.

"Whether creditors will want this bid will depend on them believing it has a substantial likelihood of going forward," said William Schorling, a veteran bankruptcy attorney with Buchanan Ingersoll & Rooney, a Downtown law firm. "Otherwise, they might just think it's just a competitor trying to destabilize Delta."

US Airways said it would divest either airline's East Coast shuttle, which ferries passengers between New York, Washington and Boston, to address antitrust concerns. The merged airline would command only 18.2 percent of the U.S. market, said US Airways in a presentation. And only 11 nonstop routes overlap between the two airlines where no nonstop competition exists, it said.

"With our tendency of going into a market and lowering fares, and the existence of low-cost competition already, we don't think there's an antitrust concern," Rader said.

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