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Just 48 hours after it appeared the battle for Midwest Air Group Inc. was nearing its final stages, the airline on Wednesday prolonged one of the year's longest-running melodramas by announcing its board would wait until Thursday to meet to consider its options. Midwest, which has been battling to stave off hostile suitor AirTran Holdings Inc. since December, said Monday it would pursue a deal to be acquired by TPG for $16 per share after AirTran refused to sweeten its $15.75 cash and share offer. But that deal, which Midwest had originally hoped to finalize by Wednesday, was thrown into doubt late Tuesday when AirTran returned with a new cash-and-stock offer valued at $16.25 per share. AirTran’s decision to jump back into the fray came as a surprise to many, especially since executives from the Orlando, Fla.-based airline had spent the better part of Tuesday on a press tour emphasizing the discounter’s growth prospects as an independent carrier. The airline said only that it decided to make a new bid after discussions with Midwest investors who were unhappy with the TPG offer.
Sources close to the deal say that two factors drove AirTran to reconsider. First, Pequot Capital Management Inc. — Midwest’s largest shareholder with an 8% stake — publicly expressed its concern that the TPG bid was inferior due to its all-cash nature. Pequot in a letter to Midwest's board said it did not like the tax implications of an all-cash deal, and said it believed there was significant upside in the shares that AirTran offered. The second factor was the surprising spread between Midwest’s share price and the offer price on Monday and Tuesday. Shares of Midwest opened Monday below $15 per share and drifted steadily downward to as low as $13.68, a full 14% below the TPG cash offer. Watchers initially attributed the downward price movement to short-term speculators who were taking their profits thinking the auction was over. But as the stock continued to weaken it signaled that investors were taking seriously AirTran’s warning that the TPG deal, which is backed by Northwest Airlines Corp., could fall under heavy antitrust scrutiny. Few are willing to predict what outcome will emerge from Midwest's board meeting. Company management, who for months waged a bitter and at times petty war with their counterparts at AirTran, appear to favor the take-private option. But industry watchers say that AirTran, which envisions using Midwest's Milwaukee base as a springboard to it becoming a nationwide discounter, is likely the more desperate bidder. AirTran should have the advantage of a consolidator: Logically it should be able to justify a higher price because of the synergies it can achieve from combining the two airlines. But TPG and Northwest have much deeper pockets and are unlikely to lose a bidding war with AirTran if they want the assets badly enough. Unfortunately the real loser could be Milwaukee, which has embraced its hometown airline and the nonstop access it provides. A bidding war could result in private owners unwilling to invest in the new planes Midwest desperately needs to be competitive, or could leave a larger AirTran more vulnerable to an industry slowdown and in need of cutbacks. —Lou Whiteman
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Midwest's statement Tags: Midwest Air, AirTran, airlines, travel, air travel, deals, m&a, mergers Categories Deal Video
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