Turning a Page on Chapter 11

17 November 2006



US Airways Offers $8.7 Billion for Delta

Last summer, US Airways approached Delta airlines, which has been flying under Chapter 11 protection for ages, with a friendly offer to take it over. Delta declined the honor. This week, Doug Parker, the head of US Airways, decided to appeal to Delta’s creditors with an $8.7 billion hostile offer. While it looks like a good offer, those holding Delta’s IOUs might just want to wait to see if the price will rise.

Mr. Parker thinks he can squeeze $1.65 billion in savings out of a merged US Airways-Delta combination. There is no reason to doubt his figure, nor his ability to implement this plan. He believes he could sell off one of the shuttle services from Boston to New York to Washington, and still wind up serving 350 destinations on 5 continents. So why not?

In the bankruptcy process, creditors are likely to get new stock in whatever airline comes out of Chapter 11. Liquidation, while probably necessary in the US airline industry from time to time, isn’t going to happen here. Instead, Delta’s unsecured creditors are being offered $4 billion in cash and 78.5 million shares of US Airways stock after Delta emerges from bankruptcy. They’re going to get something, so waiting will actually help their cause.

First, Mr. Parker doesn’t have time on his side. His $1.65 billion in savings can only happen while Delta is operating bankrupt. So once that is over, he loses $800 million or so. That is the creditors’ first pressure point. The second is the potential offer United Airlines may or may not be preparing.

United Airlines signaled its interest in Delta a year and a bit ago, but that went nowhere. Delta wanted, and claims still to want, to come out of bankruptcy as an independent airline. However, if United were to offer, say, $9 billion, then Mr. Parker has a real problem on his hands. With the clock ticking and a higher offer on the table, does he just walk away from a deal he has wanted for months? Or does he enter a bidding war? Either way, creditors benefit. Patience is a vital trait in finance.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.


Home

Google
WWW Kensington Review







Amazon Honor System Click Here to Pay Learn More