The Wall Street Journal-20080111-Delta Explores a Merger- Northwest- United Are on the Radar- Airline Stocks Rally
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Delta Explores a Merger; Northwest, United Are on the Radar; Airline Stocks Rally
Delta Air Lines Inc. is seriously considering a merger with either Northwest Airlines Corp. or United Airlines parent UAL Corp., according to people close to the situation, a move that could spur a new round of industry matchmaking as rising fuel costs hurt airline stocks.
At a meeting today, Delta's board is expected to act on a proposal to give Chief Executive Officer Richard Anderson a green light to pursue formal merger discussions with both Northwest and United. That would follow exploratory talks Delta held in December with United, Northwest and Continental Airlines Inc., according to a person with knowledge of the situation.
Delta's board may decline the request, send Delta executives back to do more work or limit the talks to one airline or the other. If formal merger talks do begin, they may not wind up with a deal.
The market reacted enthusiastically yesterday after the news of a prospective deal was reported by The Wall Street Journal. Delta shares rose $2.46, or 18%, to $15.98 in 4 p.m. New York Stock Exchange composite trading. Northwest shares rose 32%, while Chicago-based UAL was up 24%.
Any big U.S. airline merger is sure to draw heavy regulatory scrutiny because of the impact on fares and competition. United and Delta are the second- and third-largest carriers by traffic behind AMR Corp.'s American Airlines. Continental is No. 4, and Northwest is No. 5.
Still, a new round of industry consolidation would help airlines reduce excess capacity, raise fares and boost profit margins battered by oil's rise to nearly $100 a barrel, though it likely would lead to more grumbling from stressed passengers.
Merged airlines could save money by combining computer systems, reducing corporate costs and closing some hubs. Also, bigger airlines may have an edge in winning corporate accounts because they have broader route networks.
Consolidation has taken on new urgency because carriers believe the chances of getting one or two big deals approved by antitrust authorities are better under the current Republican administration. Airline executives and investors believe deals need to be forged in the next 30 to 45 days to allow enough time for scrutiny before the new administration takes office a year from now.
If Delta's board opts for merger talks, that could force Continental to consider a merger too, according to several knowledgeable people. Continental has rebuffed overtures by United, believing a merger involves too many headaches.
Delta's management and a special board committee that was formed in recent months to explore strategic opportunities haven't decided whether United or Northwest, of Eagan, Minn., would be the more attractive partner, said one person close to the situation. "Delta has comfort with Northwest, and a transaction with Northwest would be easier to do," said this person. "A deal with United could be both riskier but a more exciting transaction. Delta wants authority from its board to take the next step and talk to both."
Atlanta-based Delta successfully rebuffed a $9.5 billion hostile takeover attempt by US Airways Group Inc. early last year, when Delta still was under bankruptcy-court protection. The two most recent big airline mergers occurred when one of the parties was in Chapter 11. US Airways was acquired by America West Airlines out of bankruptcy in 2005, and Trans World Airlines, on its third bankruptcy, was purchased by American Airlines in 2001.
Creditors who handpicked Delta's board as it emerged from bankruptcy in April 2007 urged the airline's new directors to weigh opportunities for consolidation. However, the Delta board "is not necessarily of one mind about it," said one person familiar with the directors. "There is not necessarily a predilection toward consolidation."
A Delta spokeswoman said the company won't be providing updates on the board's process and otherwise declined to comment. Mr. Anderson, whose career includes a stint at Continental and as Northwest's CEO, couldn't be reached.
A Northwest spokeswoman declined to comment, as did a spokeswoman for Continental. A spokeswoman for United said her company's position "on the need for consolidation generally in the industry is well- known" and declined to say more.
After the run-up in Delta's shares yesterday, the airline's total value is calculated to be more than $6 billion. That figure takes into account some Delta shares, equal to about a quarter of the company's total stock, that must still be distributed once some remaining bankruptcy claims get settled.
Any Delta deal probably would be a stock-for-stock share swap at around market prices, said one person familiar with the matter. The acquiring company would seek to avoid piling on debt, said another person familiar with the matter.
The airline industry seemed to be returning to prosperity after a spate of post-9/11 bankruptcies, but recently airlines have taken hits from high fuel prices and a slowing economy. Competition from European airlines is likely to increase after March, when a new treaty takes effect giving European carriers greater leeway to operate flights to the U.S.
U.S. airline stocks slumped to 52-week lows in recent days, and hedge funds that bought airline stocks on hopes for mergers or asset spinoffs have become frustrated and vocal.
Hedge fund Pardus Capital Management LP, which holds shares in UAL and Delta, sent letters in November to management of both carriers advocating a merger between them. Shortly after Pardus made public its letter to Delta, Mr. Anderson announced the formation of his board's special committee.
In addition to antitrust issues, unions wary of job cuts may prove a hurdle to mergers. "The ultimate objective is to reduce costs and create a more efficient route system," said Harvey Miller, a mergers- and-acquisitions lawyer at Weil, Gotshal & Manges in New York. "You have to look at the objectives and benefits and bring the unions into the tent."
Mergers aren't the only way to eliminate excess seat capacity. Most airplanes are flying fuller than ever after years of restructuring by individual carriers. Also, consolidation doesn't reduce the price of fuel, which has overtaken labor as the biggest expense for most airlines.
For Delta's 48,000 workers, the prospect of a merger in recent months quickly undermined what had been buoyant morale. In November, Mr. Anderson told employees that even if a merger or acquisition were made, Delta would retain control of the management and keep its headquarters in Atlanta, two conditions that could now limit his ability to negotiate a transaction.
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Melanie Trottman contributed to this article.
