The private equity boom hit Milwaukee. For fans of an independent Midwest Airlines (MEH) this is a good thing. TPG Capital agreed to pay Midwest shareholders $16/share cash to take the airline private.
An interesting wrinkle is Northwest Airlines, the number two carrier out of Milwaukee’s Mitchell International Airport is putting in some money. Rick Esenberg observes, “AirTran had argued that they would actually increase service to Milwaukee by making it a second hub. Northwest must have believed it.” Or else why did get in the deal? That somewhat disparages the theory going around that Air Tran would reduce service to and from Milwaukee.
TPG/NWA won for a simple reason: they offered something better than Air Tran. The Orlando-based airline offered $15.75/share in a combination of cash and stock. TPG/NWA went with all cash. Cash’s liquidity is less risky than Air Tran’s stock. That’s understandable. The only airline to consistently earn a profit since the airline depression following the Sep. 11 attacks has been Southwest. Few think Air Tran is on par with the king of lost-cost flying.
The question now is what will be Midwest’s path to continued profitability? The Milwaukee Journal Sentinel reports TPG will let Midwest continue with its current plan of moderate growth including adding more seats to its signature two-by-two configuration. How that fits with TPG thinking there’s a market for higher-end travel I don’t know. The industry trend is towards low-cost with added bonuses. JetBlue offers all passengers satellite tv and radio, and Southwest offers its quirky style. We all know about JetBlue’s basic problems of getting people on and off their planes so the market may want an airline with a higher price that better ensures passengers get where they want to go. If so Midwest is in a good position. TPG is banking on it.
“What’s in the Cards?”
Airlines 14 Jun 2007 10:56 am
Today marks the end of Midwest Airlines as an independent, Wisconsin company. At the company’s stockholders meeting today it’s expected that three director candidates backed by AirTran will be voted onto the board:
The election will be the highlight of today’s 10 a.m. shareholders meeting. Midwest Air shareholders will choose between a slate of incumbent directors John Bergstrom, James Boris and Frederick Stratton, or challengers John Albertine, Jeffrey Erickson and Charles Kalmbach.
AirTran announced Monday that 59.5% of Midwest Air’s shares have been tendered to the takeover offer, which was extended to Aug. 10. Given that level of support, AirTran executives expect to see their three nominees elected to the board. Analysts also believe that outcome is likely.
The importance of the election is that Albertine, Erickson and Kalmbach “will bring a fresh perspective to the debate” on whether Midwest Air should enter into sale talks with AirTran, said Kevin Healy, AirTran vice president of planning.
Midwest lost a lot of sympathy when they annouced they were replaced a good portion of their two-across seating for typical three-across in order to increase revenues. They’ve not created two classes of seating making the airline little different from potential buyer AirTran. Romantic notions of “saving the cookie” lose their punch when Midwest ditches their primary market distinction.
AirTran has taken a slow and steady approach in its bid to acquire Midwest. Slowly but surely they are winning over stockholders who see a combined company in a better position to compete. Midwest reinforced that notion Tuesday when they announced they wouldn’t meet analysts’ expectations. Their growth strategy isn’t going as well as Midwest hoped.
When AirTran does buy Midwest the state will lose a good corporate citizen. I hope we gain more flights to more locations at a better price.
“Midwest Board Vote Today”
Midwest Airlines (MEH) scored a minor victory in fighting off AirTran’s (AAI) $345 million bid. A New York judge ruled Midwest didn’t have to hand over a list of shareholder names to AirTran. In the spin Midwest sees it as Wisconsin corporate law taking precedence while AirTran yelped about “full disclosure.”
It won’t matter how many names AirTran gets. If they don’t up their offer from $13.25/share there will be no deal. Midwest closed yesterday at $13.80/share.
Airlines 01 Feb 2007 07:30 am
AirTran (AAI) will extend its $345 million offer for Midwest Airlines (MEH) for another month until March 8. That could mean the low-cost airline has some takers for the deal but needs more time to get a majority. What they didn’t do is up their offer which would be hard since AirTran’s stock has gone down in the last month.
AirTran also announced Jeffrey Erickson, Charles Kalmbach and John Albertine will be nominated to Midwest’s board of directors.
UPDATE: Midwest comments on AirTran’s slate of directors:
Midwest believes that AirTran has nominated this slate to allow AirTran’s representatives, if elected, to push for a sale of Midwest to AirTran, which would deny Midwest’s shareholders the opportunity to benefit from our strategic plan.
Duh? Why else would AirTran offer up those specific people?
Airlines 26 Jan 2007 04:50 am
As reported Midwest Airlines’ (MEH) board of directors told shareholders to not give into AirTran’s (AAI) latest offer of $13.25/share. With the recent fall in AirTran’s stock Robert W. Baird & Co. put the price of the deal at $12.95/share.
With earnings of $0.29/share for 2006 that gives Midwest a price/earnings (P/E) ratio of 43. That’s quite high for an airline, but not as high as AirTran’s P/E of 83. It’s not unreasonable to see Midwest garner a P/E of 15-20. In their conference call presentation Midwest predicted 2007 earnings per share would be $1.70/share, a 93% increase from 2006. Based on management’s expected 2007 earnings Midwest’s stock could get into the 20s-30s. Yet AirTran only wants to pay $13.25/share. Midwest CEO Timothy Hoeksema doesn’t blame AirTran for trying saying, “It’s no wonder AirTran thinks we’re a good company to try to buy. We think we’re a great company for our shareholders to own.”
The big “if” is Midwest meeting its lofty expectations. It depends on the price of oil and the airline increasing passengers by 15%. Robert W. Baird & Co. is skeptical. They want more details on how the company will increase earnings. Regional flights between Milwaukee and Duluth, MN won’t do the trick.
Suppose Midwest doesn’t earn $1.70/share in 2007 but only the $0.89/share analysts expect. That would put the stock’s value at $13-17 range still better than the offer from AirTran. If AirTran wants Midwest they’ll have to up the ante which will be difficult with a falling stock price.
Airlines 25 Jan 2007 07:46 am
In his letter to Midwest AirTran CEO Joseph Leonard said,
The decision to take this step and initiate a process that is governed by SEC regulations and a fixed timetable was one that was taken after very careful thought. I should add that the decision to unilaterally increase, by $2 per share, or nearly 18 percent, the consideration we are now willing to pay over the already fair and full offer we first proposed to you on October 20, 2006, (which in itself was a 37 percent premium to the value then being accorded Midwest by the investment community and an 89 percent premium over the six months average price of your company’s stock) was also not an easy decision for us to make. However, we are willing to take this step because we fully believe that a combined AirTran and Midwest, whose shareholder base will consist of holders of both of our companies, will generate the value needed to justify our increased offer.
Leonard thinks “a combined AirTran and Midwest will materially expand service to Milwaukee and the other communities that you presently serve and the new company will provide an overall net increase in jobs and bring added job security and growth opportunities to your employees.”
This morning making his tv rounds Leonard noted Milwaukee fliers are paying 40% more for air travel than in Chicago. I did a quick search for prices on flights to Washington, D.C. in late February. In that case Leonard is correct. Chicago to Washington costs $98 (pre-taxes). On Midwest it’s $188. The trade off is dealing with O’Hare Airport and Midwest’s two-across seating. I’m probably willing to pay for it, but how many other travelers will? Midwest’s model has been a better level of service for a competitive price. That may not work in the new airline economy. Midwest’s strategy of increasing capacity with more regional flights to places like Duluth, MN (!) doesn’t seem as inspiring.
AirTran’s offer is on the table until 02.08.07.
“AirTran ups offer for Midwest“
We know where all the private equity for airlines went: down under:
QANTAS Airways has accepted an $11 billion takeover offer from an international consortium including Macquarie Bank of $5.60 a share in the biggest private equity deal in Australian history.
Qantas’s non-executive directors have unanimously recommended that shareholders accept the offer from the consortium known as Airline Partners Australia (APA) after it was bumped up from $5.50.
Qantas chairman Margaret Jackson said the offer from the Airline Partners Australia consortium was 33 per cent higher than Qantas’s closing share price of $4.20 on November 6, when the prospect of a bid was first raised.
“The directors believe this offer allows Qantas shareholders to realise significant value for their shares that has not been fully recognised in the public market,” Ms Jackson said.
“If this acquisition is successful, Qantas will remain a majority Australian-owned, Australia-based airline,” Ms Jackson said.
The investor group sweetened the deal after it was rejected the day before.
On the heels of buying part of Sabre Holdings Texas Pacific Group grabbed a chunk of Qantas. Rumor has it a piece of the moon is next on their list.
For Qantas stockholders this is icing on the cake (or another shrimp on the barbie?). The stock has been on a tear since late summer.
The market talk today is airline consolidation. United (UAUA) talking to Continental (CAL) (with Northwest (NWACQ) in the background). AirTran (AAI) talking to Midwest (MEH). This is on top of U.S. Airways going after Delta. I won’t be surprised if defunct Pan-Am rises from the grave and goes after someone. And what about private equity? They’ve been buying anything like their money is burning a whole in their pockets. Let’s get to some details:
From MarketWatch on a possible United-Continental merger:
Analysts have long favored a combination of United’s Asian routes and heavy coverage of the western United States with Continental’s Latin American and European routes and its large and highly profitable hub in Newark, N.J.
On an AirTran-Midwest hookup we have the take from the Milwaukee Journal Sentinel:
A merger of AirTran and Midwest might change the nature of air travel from Milwaukee.
“Milwaukee has been extremely well served by having a hometown-headquartered airline here, and I would hate to lose that,” said Tim Sheehy, president of the Metropolitan Milwaukee Association of Commerce.
“The critical thing here is the quality of the air service,” Sheehy said. “And they have given us better air service than most markets our size.”
Midwest was launched in 1984 as a spinoff from Kimberly Clark’s corporate aviation division. Midwest was founded by Timothy Hoeksema, who remains as chairman, chief executive officer and president.
Midwest competed with much larger airlines by filling a niche. It offered award-winning service, including wide, two-across seating, gourmet meals served on china, and complimentary wine and champagne. That appealed to business travelers, who were more willing to pay the higher fares demanded by Midwest.
The formula worked until the recession hit in 2000, followed by an even greater slowdown in travel after the 2001 terrorist attacks.
Midwest came close to filing for Chapter 11 bankruptcy protection in 2003. The company managed to avoid it through a large refinancing package.
The company renegotiated agreements with aircraft lessors and lenders, and arranged for about $40 million in financing. Also, unions representing pilots and flight attendants agreed to wage concessions.