Delta Spurns US Airways’ $8.4 Billion Bid

For a company in Chapter 11, Delta Air Lines has a lot of nerve. US Airways had offered $8.4 billion to takeover Delta. Yesterday, Delta’s board formally rejected the idea. Instead, Delta has a plan that will have it out of bankruptcy as a standalone company next spring. On top of that, Delta claims it will be profitable in 2007. Six months from now, this will either be proved an inspired self-confidence or self-deception on a colossal scale.

Delta said in a statement, “The board concluded that Delta’s standalone plan will provide the company’s creditors with superior value and greater certainty on a much faster timetable than the US Airways proposal.” That plan calls for a 50% reduction in long-term debt, and an increase in net income (less profit-sharing) to $1.2 billion in 2010 from $500 million next year. For the nine months ended September 30, 2006, Delta had a net loss of $1.3 billion according to its 10-Q. One remains dubious.

Delta did make a credible argument against the US Air offer. It questioned the economic assumptions that underlie it; such assumptions are almost always favorable to a merger when one wants them to be – realistic runs a distant second to desirable. Delta also pointed out that there remain labor difficulties, which contributed to its own bankruptcy in September 2005. Finally, Delta pointed out, quite accurately, that US Air’s 2005 merger with America West (a much smaller deal) still hasn’t been fully integrated. Whether US Air could digest Delta as well is a good question.

Since the company is in Chapter 11, the board’s decision is not paramount. The real power here lies with the unsecured creditors’ committee. They haven’t come down in favor of US Airways, of Delta or of some other option. When all is said and done, though, it is hard to see the committee not getting its way.

In a statement, US Airways said, “We remain a determined, disciplined bidder and are confident the offer we made presents the greatest value for all our stakeholders.” The Blackstone Group, which is advising Delta, believes the company will be worth $9.4-12 billion when it comes out of bankruptcy. Officials at US Air have said they would increase their offer if they could be convinced Delta was worth more. US Airways isn’t out of the picture by a long way.

© 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.

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