United to America West: Let's Make a Deal!
By Holly Hegeman
Special to TheStreet.com
2/20/99 12:25 PM ET
So, it was reported yesterday that UAL (UAL:NYSE), the parent of United Airlines made an all-cash offer to America West (AWA:NYSE) on Wednesday. Yeah, so?
While sources have been shut up tight about negotiations since we first broke the news about the story last month, there is no doubt that United continued to be the strongest suitor in question for the Phoenix-based airline. If that situation had changed, we would have told you. And basically, from what we understand, the deal now in AWA's lap is about what we had outlined last month.
United is looking at AWA for the airline's assets, not it's operations. In addition, UAL, which had already given its pilots' union a heads up on the deal last month, has stipulated that the deal is contingent upon all the union groups at UAL giving their approval in terms of merging senority lists, etc. However, as both the pilots and the flight attendants are represented by the same union, this makes a deal much easier. In addition, as we have alluded to here in the past, America West employees will not argue with a deal that has them merged with United.
So no, this won't be like the Reno Air (RENO:Nasdaq)/American Airlines (AMR:NYSE) fiasco.
When Delta Air Lines (DAL:NYSE) announced on Tuesday that it was purchasing it's Delta Connection partner, Atlantic Southeast (ASAI:Nasdaq), it did not take a rocket scientist to surmise that this was the end of Delta's designs on America West. Why? Simple math. Delta is going to shell out $700 million for ASAI. With the going rate for AWA around $800 million or so, the probabilities of Delta paying out $1.5 billion on two acquisitions were slim to none to well, non-existent.
Then again, we never thought the Delta negotiations were as solid as those of UAL's, as we had mentioned here before.
The wildcard in all of this continues to be Continental (CAIA:NYSE). If you recall, Gordon Bethune, the always-quick-with-a-quip CEO of Continental, basically drew the line in the sand when the UAL/AWA merger plans were first announced last month. Gordon reminded all the participants that Continental holds the first right of refusal for the controlling stake in AWA, and would not hesitate to exercise that right.
However, two weeks ago at a Goldman Sachs investment conference, AWA Chairman Bill Franke let institutional investors know that David Bonderman, the person who controls that stake, was willing to sell his Shares -- but that he would only sell his shares if all of America West's outstanding shares were sold (no partial buyouts). This, I sensed, was more or less a warning to Continental that it couldn't stop a deal by putting up $50 million for Bonderman's stake.
So, let's just be practical here and take a Wing Tips's Reality Check on several issues. First, many analysts are saying that a UAL/AWA deal would never be approved by U.S. regulators.
I disagree. If they are going to approve the virtual merger of the No. 4 and No. 5 airlines (Northwest (NWAC:Nasdaq) and Continental), why wouldn't they approve the merger of America West and United? Yes, there is some route overlap, but not enough, in my opinion, to kill a deal outright.
Second, it's clear that David Bonderman is the big dog in this game, via his stake in America West. If he wants a deal with UAL, then Gordon Bethune will be hard pressed to step in the way and prevent it, in my estimation.
Could Continental step in and buy America West? They could, but I believe it would mean they would have to do the whole deal, not just the $50 million that constitutes Bonderman's stake. There is no doubt that America West is an important partner to Continental. The airline feeds a great deal of traffic to Continental's eastern operations. However, I highly doubt that the Department of Justice would let Continental, which is in the process of trying to get its virtual merger with Northwest approved, also pick up America West.
And finally, is this the start of a new wave of airline-industry consolidation? I hate to tell you this, but the consolidation has already begun.
As industry analyst Robert W. Mann said rather facetiously in a note to me yesterday,
"Northwest/Continental, American/Reno, Delta/ Atlantic Southeast, United/ America West ... methinks we are seeing one of those epic occurrences of Large-scale movement in the industry's tectonic plates ... which is about to become an out-and-out, 10 on the Richter scale, consolidation of earthquake proportions."
Always looking for the freshest news, I wrote him back to ask him if he meant "teutonic plates." But we agreed that no merger or acquisition news was circulating about Lufthansa, the German flagship carrier.
Holly Hegeman, based in Dallas, pilots the Wing Tips and Traveling With Wings columns for TheStreet.com. At time of publication, Hegeman held no positions in stocks discussed in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. You can usually find Hegeman, publisher of PlaneBusiness Banter, buzzing around her airline industry Web site at www.planebusiness.com. While she cannot provide investment advice or recommendations, she welcomes your feedback at hhegeman@planebusiness.com. |
