Potential Delta/United merger?

[10023]

Originally Posted by Capt AWACS

If NWA were swallowed by Delta then Northwest would no longer have the "golden share" allowing them to nix any Continental merger.
Continental could then swallow United.

Originally Posted by Capt AWACS

As I noted that would only be if United was the aquiring carrier-NOT likely to happen. If CO is the buyer then it stays in Houston, this is how aviation works.

Ciao,
AWACS

Pretty sure you're wrong here.

United is almost twice the size of Continental in the context of an M&A deal. But United could certainly swallow Continental. In any case it would have to be a stock deal and UAL's market cap is $4.0 billion vs. $2.4 billion for Continental. Neither company has the debt capacity required for a cash deal.

Delta is slightly larger than United so would technically be the "acquiror", but again any transaction would at least have to consist of a mix of cash and stock because they don't have the cash/borrowing capacity required to buy United outright. Delta could take on another $2bn of debt in a merger tops; United is worth over $10bn including net debt and in anything but an MOE (merger of equals), you'd have to pay a few billion dollar control premium on top of that.

Basically, if Delta and United merge you'd likely have a situation where Delta shareholders own ~52% and United shareholders own ~48%. In a United/Continental merger, United shareholders would own ~62% and Continental shareholders would own ~38%. Northwest is about the same as United in terms of equity market cap; enterprise value is lower but they've still got too much net debt to make a cash acquisition by anyone practical, so you could basically substitute Northwest for United in either of the above scenarios. In the United/Continental case, the relative share of ownership may shift a little, but not much, in Continental's favor if United were to pay a small control premium, but I think any of these would be done as an MOE.

Bear Stearns published a research report on Continental Airlines last Friday looking at the numbers for a merger with Northwest or United (deal value, potential share price upside for Continental, synergy potential, integration concerns, etc). A deal with Northwest is unlikely and in a deal with United, United would certainly be the acquiror.

[Major AWACS]

Originally Posted by 10023

Pretty sure you're wrong here.

United is almost twice the size of Continental in the context of an M&A deal. But United could certainly swallow Continental. In any case it would have to be a stock deal and UAL's market cap is $4.0 billion vs. $2.4 billion for Continental. Neither company has the debt capacity required for a cash deal.

Delta is slightly larger than United so would technically be the "acquiror", but again any transaction would at least have to consist of a mix of cash and stock because they don't have the cash/borrowing capacity required to buy United outright. Delta could take on another $2bn of debt in a merger tops; United is worth over $10bn including net debt and in anything but an MOE (merger of equals), you'd have to pay a few billion dollar control premium on top of that.

Basically, if Delta and United merge you'd likely have a situation where Delta shareholders own ~52% and United shareholders own ~48%. In a United/Continental merger, United shareholders would own ~62% and Continental shareholders would own ~38%. Northwest is about the same as United in terms of equity market cap; enterprise value is lower but they've still got too much net debt to make a cash acquisition by anyone practical, so you could basically substitute Northwest for United in either of the above scenarios. In the United/Continental case, the relative share of ownership may shift a little, but not much, in Continental's favor if United were to pay a small control premium, but I think any of these would be done as an MOE.

However I didn't say it 'would' be an all cash deal. The fact is CO cannot merge without Northwest's consent, unless NWA merges with someone else. I can post the fillings on the golden share.

Market cap is not the only player in a merger scenario here. paredus and bethune have found magically ways of finding funding before, I could easily see them doing that again.


But my points her are on the HQs and management and are echoed by many in the industry. CO has the better management team and would most likely survive the mergers intact. UAL has a horrid management team. The argument by some, that HQs would all swarm to Chicago because it is a 'bigger' city is not really valid. If that were the case New York would have more HQs due to all their hubs, but they don't Fort Worth, Houston, and Atlanta have some.

As you know mergers and/or takeovers are complex issues. Hell we haven't even begun to talk about labour relations...

Ciao,
AWACS

[10023]

Originally Posted by Capt AWACS

However I didn't say it 'would' be an all cash deal. The fact is CO cannot merge without Northwest's consent, unless NWA merges with someone else. I can post the fillings on the golden share.

Market cap is not the only player in a merger scenario here. paredus and bethune have found magically ways of finding funding before, I could easily see them doing that again.

But my points her are on the HQs and management and are echoed by many in the industry. CO has the better management team and would most likely survive the mergers intact. UAL has a horrid management team. The argument by some, that HQs would all swarm to Chicago because it is a 'bigger' city is not really valid. If that were the case New York would have more HQs due to all their hubs, but they don't Fort Worth, Houston, and Atlanta have some.

As you know mergers and/or takeovers are complex issues. Hell we haven't even begun to talk about labour relations...

It can't be an all cash deal. And the reality is that in a stock deal, given the exchange ratio that would result from an MOE or any reasonable premium, UAL would be the acquiring company. Whether or not they choose to replace Glen Tilton, the UAL board would have majority control and UAL just signed on for HQ space in Chicago's Loop, with naming rights. Obviously the new entity can locate wherever they choose, but it would not be at the sole discretion of CAL management.

For full disclosure - I do not work in the airline industry, but I am an associate with a mergers & acquisitions advisory firm so I am not speaking out of ignorance with regard to the points I've made. I would defer on things like which management team is more suited to run the combined entity, labor issues, maintenance and equipment issues, current code-sharing alliances, etc to somebody who works in the industry (although I have been reading the updates from research analysts who do have expertise in these areas).

[Major AWACS]

Originally Posted by 10023

It can't be an all cash deal. And the reality is that in a stock deal, given the exchange ratio that would result from an MOE or any reasonable premium, UAL would be the acquiring company. Whether or not they choose to replace Glen Tilton, the UAL board would have majority control and UAL just signed on for HQ space in Chicago's Loop, with naming rights. Obviously the new entity can locate wherever they choose, but it would not be at the sole discretion of CAL management.

For full disclosure - I do not work in the airline industry, but I am an associate with a mergers & acquisitions advisory firm so I am not speaking out of ignorance with regard to the points I've made. I would defer on things like which management team is more suited to run the combined entity, labor issues, maintenance and equipment issues, current code-sharing alliances, etc to somebody who works in the industry (although I have been reading the updates from research analysts who do have expertise in these areas).

I never said it would be an all cash deal.

I mentioned earlier that the only exception to NWA's golden share in CO is for certain all cash deals, or airlines with less than a Billion net income each year.

Having a lease on a HQs space means little. US Air gave that up in a heartbeat for PHX. I am not saying it wouldn't happen, as I noted above, but industry insiders seem to think otherwise. Not to mention what the feds will do. Rumours here in DC are they don't want to mergers in one year. I meet with Rep Milner's office yesterday (for my regular work) and some of his staff chatted with me about the airline lobbying going on to allow multiple mergers and how the feds are not so hot to trot on it due to the overlapping hub closures. I have heard other rumours from others on the hill about this-but I am not an airline lobbyist, I am a WC lobbyist so the fed side of airline work is not my speciality.

Ciao,
AWACS

[10023]

I think it's generally assumed that Continental won't be involved in any deals absent sector consolidation (i.e. Northwest doing a deal of their own, thus forfeiting their golden share). And I know you never said it would be an all-cash deal, I was just clarifying that it's not an open question - it would certainly be a stock deal.

The general read I've heard is that if there is an airline industry consolidation, it has to happen quickly before the Democrats almost certainly gain control of the White House and more congressional seats in 2009. They're also all waiting to see who'll go first, because one deal happening greases the wheels a bit for a second in terms of government approval and labor.

[Major AWACS]

Originally Posted by 10023

I think it's generally assumed that Continental won't be involved in any deals absent sector consolidation (i.e. Northwest doing a deal of their own, thus forfeiting their golden share). And I know you never said it would be an all-cash deal, I was just clarifying that it's not an open question.

The general read I've heard is that if there is an airline industry consolidation, it has to happen quickly before the Democrats almost certainly gain control of the White House and more congressional seats in 2009.

I have heard the same from most sources. Financial times did story on it end of December and said the same thing as well.

Sorry if I misunderstood the direction of your cash option comments.

Politicians don't like to lose hubs and in these deals that would happen.
If west Texas intermediate stays near 100$ a barrel something will need to be done eventually to cut costs a bit.

Continental is lucky they have a solvent funded pension, and pilots retiring at 65 instead of 60 will save them more money (other airlines as well).

one thing that will not happen in CO and DL. That is predicted to cost over 100$M a year extra.

Ciao,
AWACS

[10023]

Originally Posted by Capt AWACS

Politicians don't like to lose hubs and in these deals that would happen.
If west Texas intermediate stays near 100$ a barrel something will need to be done eventually to cut costs a bit.

I'd edited my prior post but see you've already responded, so will move the conversation here:

I'm not in any way arguing that they'd locate in Chicago because it's a bigger city, etc. That's a rather unsophisticated argument posited by city boosters on this board in any merger situation. I'm just disputing your 1) inaccurate statement that Continental would be the acquiror and 2) your confidence that Houston would be chosen because Continental has the better management team. In any event, United's shareholders and Board would have greater control. Perhaps it's a compromise where they put Continental's management in charge, but locate the HQ in Chicago? It's not certain either way, but you seemed to imply it was. Further, the UAL board is very involved in the Chicago business community (members of the Economic Club of Chicago and World Business Chicago, contributed to Millennium Park, instrumental in bringing Boeing to Chicago, etc). I think they would be ill-disposed to moving the headquarters from Chicago and I don't think any airline mergers are going to happen without the support of both Boards of Directors and management teams, particularly not this one. Not only would Continental, as the smaller company, dilute their shareholders significantly if they were to go hostile and pay a significant premium for United, but given the issues around Federal regulation and labor, a hostile takeover is all but impossible.

From one I've heard United/Continental works in some operational parameters because their fleets share 4 aircraft in common and employees are in the same union, but that's outside of my scope of expertise. Between the two of us I think we've got the ability to do some pretty rational analysis around this.

[Major AWACS]

I'm just disputing your 1) inaccurate statement that Continental would be the acquiror and 2) your confidence that Houston would be chosen because Continental has the better management team.

I disagree with 1. I have read one or two plausable scenarios where CO is the aquiror not UAL, that is not my expertise but it was the expertise of the folks making the statements so I can only take them for their word. All that being said, I don't think CO has to merge with anyone. I hope CO remains stand alone in its current form. It suits my needs better and per todays earning call the needs of its top 50 biz contracts as well.

I never said Houston would be kept simply because the CO management team is better, I noted the arguments for Chicago were the same for Houston, strong business ties etc etc, and the rest was nonsense city boosterism.
CO actually has more invested in OPs centres in Texas than UAL in Elk Grove (not the actual HQs is linked to ops).

I don't see a hostile takeover from CO either.
UAL tried to take US Air in 2000, the feds killed that. There was thought that they would have killed US air's attempt to take DL last year.

CO and UA could fit, but there are still huge issues with labour integration related to seniority (pilots, FAs) and rankings. There are plenty more.

CO could actually use NW's Pacific routes as CO is already huge to Latin America via Houston and Europe via EWR (and a lessor extent IAH).
So CO and NW work best from a route perspective but NWs old DC9s and Airbuses don't mix well for COs simple subfleet plan.

Ciao,
AWACS

[oftrue]

Who cares where the headquarters will be, it doesn't mean anything if the service sucks. I must tell you after traveling international twice last year, you are glad to see anything american in a foreign country. The last thing on your mind is where the headquarters is located, you just want to get back home to the U.S. hopefully on business class seat. I think Delta-Northwest is the strongest, because of alliances with Air France. Alliances means everything today.

[Major AWACS]

Originally Posted by oftrue

Who cares where the headquarters will be, it doesn't mean anything if the service sucks. I must tell you after traveling international twice last year, you are glad to see anything american in a foreign country. The last thing on your mind is where the headquarters is located, you just want to get back home to the U.S. hopefully on business class seat. I think Delta-Northwest is the strongest, because of alliances with Air France. Alliances means everything today.

I have travelled international twice this month already and must say I disagree but that is just my experiance as a FFlyer.

The Foreign airlines normally rank higher than US ones. US service sucks, with Cotinental the constantly highest ranked Int'l biz service airline.

Continental is also in SkyTeam with Air France/KLM with DL and NW (and Alitalia, Aeroflight Czechair, Korean, Copa and others) www.skyteam.com

Ciao,
AWACS

[10023]

Originally Posted by Capt AWACS

I disagree with 1. I have read one or two plausable scenarios where CO is the aquiror not UAL, that is not my expertise but it was the expertise of the folks making the statements so I can only take them for their word.

I don't know what sources you're citing, but that's probably a matter of semantics as to which is the surviving legal entity. The economics are what they are.

Example:

Company A and Company B each have 100,000 shareholders with 1 share apiece. Company A's stock price is $25 and Company B's stock price is $15. Therefore, Company A is worth $2,500,000 and Company B is worth $1,500,000.

If Company A acquires Company B in a no premium deal, Company B shareholders receive 0.6 shares of Company A for each share of Company B that they currently own ($15/$25). As a result, the combined entity ("Company C") would have 160,000 shares outstanding; Company A shareholders would own 100,000 shares (62.5%) and Company B shareholders would own 60,000 shares (37.5%). As Company A is the acquiror, the legal entity would remain the same and the stock of the combined entity would trade under Company A's name and ticker symbol.

If Company B acquires Company A in a no premium deal, Company A shareholders receive 1.67 shares of Company B for each share of Company A that they currently own ($25/$15). As a result, Company C would have 267,000 shares outstanding; Company A shareholders would own 167,000 shares (62.5%) and Company B shareholders would own 100,000 shares (37.5%). But as Company B is the "acquiror", it would survive as the legal entity and the stock of the combined entity would trade under Company B's name and ticker symbol.

The decision to do it one way or the other depends on a variety of factors (tax considerations are particularly important), but the economic reality is what it is in terms of which company's shareholders (and the Board of Directors that represents them) has effective control post merger.

[Unity77]

Originally Posted by Trae

I hope the DL/NW happens in CO picks a partner (most likely UA and maybe Alaska). The HQ would definitely stay in Houston, too (just like Atlanta would remain the HQ with a NW merger).

Are you sure about this? If Delta and NWA merge, I can see the Delta name remaining, but the headquarters remaining in Atlanta is not a sure thing. After all, Delta's CEO has backed off his initial statement that Delta's headquarters will remain in Atlanta.

http://www.duluthnewstribune.com/ap/...w&id=D8U78ON84

Also Wednesday, Sen. Johnny Isakson, R-Ga., said Delta CEO Richard Anderson confirmed in a phone conversation Friday that "as far as he was concerned" Delta would merge only if it keeps its name and maintains its current presence in Atlanta, where it is headquartered.

"He said that unequivocally," said Isakson, who called Anderson after reading reports of merger talks. But it has not been clear whether Anderson would be willing to move Delta's headquarters as part of a combination with another carrier.

A headquarters move for Northwest could prove expensive.

If MPLS-STPL loses its headquarters due to a merger, the newly formed airline will lose $215 million a year until 2020 in rebates and discounts at MPLS-STPL International if it doesn't live up to written commitments to keep a hub and headquarters in the Twin Cities.

[STrek777]

Well hey guys! So this is where you have gone off to. BTB in case you need more to read up on here is the link where I have been giving my .02. Have a great day!!!

http://forum.skyscraperpage.com/showthread.php?t=102191

[10023]

Originally Posted by Unity77

If MPLS-STPL loses its headquarters due to a merger, the newly formed airline will lose $215 million a year until 2020 in rebates and discounts at MPLS-STPL International if it doesn't live up to written commitments to keep a hub and headquarters in the Twin Cities.

Now that's a pretty powerful argument.

Remember that "maintains its current presence in Atlanta" probably refers more to the operations than the headquarters. And for obvious reasons, I think politicians care more about keeping thousands of maintenance workers, mechanics, pilots and flight attendants based in their city than a hundred or so head office staff.

[Atlriser]

How about a new debate? Throw out the idea: Since NWA controls over CO merging, that Delta/NWA/CO all reach an agreement where by Delta acquires NW. As part of the agreement CO gets some assests thus creating a larger western presence and giving it a chance to stay independent without merging. Thus NWA gets something from CO for it giving up the control of destiny over CO and CO purchases some western presence. Don't forget Comair and Delta using it as a bargaining chip either. While it's a minor asset in a combined Delta/NWA, it has an extensive western presence in smaller non hub markets that could be used to build a hub for CO in the west. All three airlines would gain in some sort of arrangement and leave the remaining Delta and CO stronger in all markets and thus possibly limiting any more consolidation within the next 2 years making Congress, Democrats and the regulators happy for now.

[Major AWACS]

Originally Posted by Atlriser

How about a new debate? Throw out the idea: Since NWA controls over CO merging, that Delta/NWA/CO all reach an agreement where by Delta acquires NW. As part of the agreement CO gets some assests thus creating a larger western presence and giving it a chance to stay independent without merging. Thus NWA gets something from CO for it giving up the control of destiny over CO and CO purchases some western presence. Don't forget Comair and Delta using it as a bargaining chip either. While it's a minor asset in a combined Delta/NWA, it has an extensive western presence in smaller non hub markets that could be used to build a hub for CO in the west. All three airlines would gain in some sort of arrangement and leave the remaining Delta and CO stronger in all markets and thus possibly limiting any more consolidation within the next 2 years making Congress, Democrats and the regulators happy for now.

Interesting thought. Not sure how the lawyers and accountants would do it but from a route planning and operations perspective it is doable.

Ciao,
AWACS

[oftrue]

Originally Posted by Capt AWACS

I have travelled international twice this month already and must say I disagree but that is just my experiance as a FFlyer.

The Foreign airlines normally rank higher than US ones. US service sucks, with Cotinental the constantly highest ranked Int'l biz service airline.

Continental is also in SkyTeam with Air France/KLM with DL and NW (and Alitalia, Aeroflight Czechair, Korean, Copa and others) www.skyteam.com

Ciao,
AWACS

I think it suck with coach service, but if you are able to fly business class the experience is much better. I have heard that foreign carriers do leave american carriers in the dust, especially sinagapore airlines.

[nomarandlee]

http://www.suntimes.com/business/746...011708.article

United union seeks transparency in merger talks

January 17, 2008
BY FRANCINE KNOWLES
United Airline’s labor unions are signalling they have no intention of taking a back seat amid reported merger talks under way between United Airlines and Delta Air Lines Inc.

United’s machinists sent a letter Wednesday to United Chairman Glenn Tilton saying it expects to be made aware of any significant progress toward a merger and kept informed.

“The International Association of Machinists, through our merger committee, is currently evaluating the various scenarios that could result from your merger discussions,” said Robert Roach Jr., general vice president of the union, which disclosed the letter today.

As the certified collective bargaining agent for the largest number of United employees, Roach said, “we expect to be made aware of any significant progress towards a merger within the limits of the law.”

Roach requested that management executives open a dialogue with IAM officials “so that we may have a transparent process.” The union “is prepared to protect the interests and continued IAM representation of all our members,” Roach said. “If a proposed merger agreement adversely impacts IAM members and the flying public, the machinists union will partner with Congress, other labor organizations and any other entity to protect our members.

“...We are committed to ensuring that no IAM member is adversely affected as a result of any merger or consolidation, even if that means that the merger ultimately fails.”

The IAM represents about 15,000 baggage handlers, reservation agents, and customer service workers at United.

Steve Wallach, the chairman of the Master Executive Council in United’s chapter of the Air Line Pilots Association, contends any merger or consolidation involving United Airlines won’t be consummated without the involvement of United’s pilots.

The union represents about 7,200 pilots at United.

“United pilots will not rubber stamp any merger unless and until our interests are addressed,” Wallach said earlier this week.

United did not immediately return a call for comment.

The Wall Street Journal reported Tuesday that Delta hopes to reach a deal with either United or Northwest over the next two weeks.

U.S. Rep. James Oberstar (D-Minn.) met with Minneapolis-based Northwest Airlines Corp. executives and was told Delta Air Lines Inc. is in the “early stages” of talks on a merger with Northwest and United’s parent UAL Corp., according to a Bloomberg News report Wednesday.

..

[mcfinley]

Originally Posted by Atlriser

How about a new debate? Throw out the idea: Since NWA controls over CO merging, that Delta/NWA/CO all reach an agreement where by Delta acquires NW. As part of the agreement CO gets some assests thus creating a larger western presence and giving it a chance to stay independent without merging. Thus NWA gets something from CO for it giving up the control of destiny over CO and CO purchases some western presence. Don't forget Comair and Delta using it as a bargaining chip either. While it's a minor asset in a combined Delta/NWA, it has an extensive western presence in smaller non hub markets that could be used to build a hub for CO in the west. All three airlines would gain in some sort of arrangement and leave the remaining Delta and CO stronger in all markets and thus possibly limiting any more consolidation within the next 2 years making Congress, Democrats and the regulators happy for now.

I like it in it's efficiency in resources, and the maintenance of distinct corporate cultures. Really, everybody wins except for board members who stand to lose a substantial payout, executives who stand to lose their golden parachutes, and the lawyers and consultants that stand to lose excessive merger fees.

In other words, there's a snowfall's chance in hell.

[STrek777]

Originally Posted by nomarandlee

..United union seeks transparency in merger talks

http://www.suntimes.com/business/746...011708.article

While I take what the union has to say with larger grains of salt it’s still grains of salt. Delta Air Lines acquired Chicago and Southern Airlines (C&S) in 1953, Northeast Airlines in 1972, and Western Airlines in 1987. In 1991, Delta acquired the transatlantic routes of a bankrupt Pan Am and that same year also pick up quite a bit of what Eastern Airlines left behind to become a major provider of service domestically and across the Atlantic.

After all that, Delta still operates with only one union. Just because UA or NW has unions that preach loudly doesn’t mean that everyone is listening to the sermon. So they have union issues… show me a company that is just as eaten alive by them and you will find the same unrest. The employees want to be heard so the scream at their union leaders who in turn scream at the company executives and the executives turn around and start screaming at the union leaders. The employees get offended, and the unions get offended, and the executives get offended. But the executives are going to keep doing exactly what they want to do despite all the screaming.

Delta has over 45,000 non union employees who are enjoying not paying union dues and still being asked to do the same amount of work for roughly the same pay as those airlines that have unions and the employees pay union dues. Show me one thing just one example of what the unions got accomplished on behalf of the employees they represent that justified the dues they pay. Not every decision made by the executives is correct or justified but I can’t think of one thing that they unions were able to protect the employees from.

US – frontline employees took a 22% pay cut, reservation offices were closed, airport assets were re-aligned, and hundreds of jobs were cut.

UA – massive pay cuts, reduced benefits, flight privileges reduced, went from over 80,000 employees down to just about 50,000, executives gave themselves massive bonuses post bankruptcy.

NW – reduced pay by some 20%, modified flight privileges, large employee cuts, hired temporary mechanics rather than deal with the ones on strike.

AA – these people got the worst of them all. AA broke their word and slashed TWA employee seniority to bits. Reduced pay, reduced benefits, reduced flight privileges, gave executives a pay raise, and tried forcing the pilots to fly round trip DFW – PEK. AA takes the cake for screwing over employees.

ALL OF THEM HEAVILY UNIONIZED!!!

I’m sorry but I strongly feel once the acquiring company starts reminding the employees all that the union failed them on and how their former bosses screwed them over, they will vote the union out. If I’m buying you… you don’t get to force your bad apples into my basket. So let the unions saber rattle all they want… they just know that with Delta Air Lines as the acquirer their future is not so “written in stone” guaranteed.