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US Airways makes $8 billion cash and stock offer for Delta once Delta emerges from bankruptcy

SHARE US Airways makes $8 billion cash and stock offer for Delta once Delta emerges from bankruptcy

ATLANTA — US Airways Group Inc. made a hostile $8 billion cash and stock bid for Delta Air Lines Inc. on Wednesday, a deal that would create one of the world's largest carriers. The move came despite Delta's repeated statements it isn't interested in a merger.

The offer to buy Delta once the Atlanta-based airline emerges from bankruptcy protection by the middle of 2007 would give Delta's unsecured creditors $4 billion in cash and 78.5 million shares of US Airways stock. Delta has yet to file its own plan of reorganization.

As it stands now, Delta's common shares are likely to end up worthless when it exits bankruptcy. In most bankruptcy cases, the debtholders usually end up with new shares of the company.

Shares of US Airways rose $2.90, or almost 6 percent, to $53.83 in morning trading on the New York Stock Exchange.

If the deal is completed, the airline would operate under the Delta name and serve more than 350 destinations across five continents. US Airways has not decided where the merged company would be based. The merged company would divest certain assets, including a shuttle that operates in the Northeast. It also said it would optimize flights at its hubs, but did not say what further impacts the hubs could face.

Doug Parker, chief executive of Tempe, Ariz.-based US Airways, said in a telephone interview that he is aware of the comments made by Delta's management in recent months, but he believes this is a fair offer and that ultimately Delta's creditors will see that.

"Delta is in bankruptcy and bankruptcy is a very open process," Parker said. "The process is designed so that the creditors get the highest possible value for their clients. Given that process, what we have done is gone public with an alternative to a standalone plan."

Delta Chief Executive Gerald Grinstein issued a statement saying the carrier would review the proposal, but would push ahead with its goal to file its reorganization plan by Feb. 15. "Delta's plan has always been to emerge from bankruptcy in the first half of 2007 as a strong, standalone carrier," Grinstein said.

The deal would be subject to regulatory, creditor, U.S. Airways shareholder and court approval.

Grinstein said last month that he had received "feelers" from UAL Corp.'s United Airlines about a possible merger 18 months ago, but that he quickly rejected them. He reiterated at the time that Delta has no plans for a merger.

US Airways, the sixth-largest U.S. carrier, also had been reported to be interested in Delta months ago, and it released letters Wednesday showing its previous communications with Delta, the third-largest U.S. carrier.

Parker said a US Airways-Delta combination would have about 85,000 employees. He said he would anticipate flying with 10 percent fewer planes, but that doesn't mean job cuts.

"The plan is not predicated on any job cuts," Parker said.

Parker did not say why US Airways was moving now, but he did say the airline believes its offer is a good one.

"We expect it would prevail over any other bid if there were any," Parker said.

During a conference call, some analysts were skeptical of US Airways' confidence it can get the deal done if Delta is hostile to the bid. They also questioned why US Airways is bidding for Delta, as opposed to another airline, like Northwest, which also is in bankruptcy.

Parker said the bid for Delta makes more sense because of the synergies that can be realized. He also said he is confident the deal can clear all the hurdles it needs to.

"There are no issues that can't be done," Parker said defiantly.

Analysts raised the possibility this could spur offers from other airlines. A spokesman for American Airlines said the AMR Corp. unit had just seen the announcement and had no immediate comment. Officials at Southwest Airlines Co. did not immediately return calls for comment.

US Airways has hubs in Phoenix, Philadelphia and Charlotte, N.C. Delta's hubs are in Atlanta, Cincinnati and Salt Lake City.

The deal makes the most sense only if it is consummated through the bankruptcy process, rather than waiting until after emergence to reach agreement, Parker told analysts in a conference call. That's because of further cost cuts that could be gained through the bankruptcy court.

As for employees, Parker said "we happen to have similar labor costs on both sides." He did not discuss pilot pay, in particular.

Passengers, meanwhile, were weighing in on Wednesday's offer.

At Hartsfield-Jackson Atlanta International Airport, Dave Gheesling of Atlanta was traveling on business to Dallas when he heard the news.

"It seems fairly clear that the long-term current business models in place have to change in some way or another," said Gheesling, 39, who works in the flooring industry.

US Airways said it has received a financing commitment from Citigroup Inc. to provide $7.2 billion in new financing for the deal.

This funding would be used to refinance Delta's debtor-in-possession credit facility, refinance US Airways' existing senior secured facility with GE Capital, and provide the funding for the $4 billion cash portion of US Airways' offer. All other allowed secured debt and administrative claims would be assumed or paid in full.

US Airways said the offer is a 25 percent premium over the current trading price of Delta's pre-petition unsecured claims as of Tuesday, and a 40 percent premium over the average trading price for Delta unsecured claims over the last 30 days.

According to letters filed with the Securities and Exchange Commission, Parker originally had a conversation with Grinstein about a combination of the two airlines in the spring and followed up with a letter to Grinstein on Sept. 29.

In a letter to Parker dated Oct. 17, Grinstein said he and Delta's board "believe it would not be productive to engage in the type of exploratory discussions that you proposed at the time."

US Airways, which was created after US Air emerged from bankruptcy and was acquired by America West last year, said the deal is expected to generate $1.65 billion in annual savings from optimization of the airlines' complementary networks and combining facilities in overlap airports.

The deal would reduce unprofitable flying and improve the mix of traffic, US Airways said.