Fingernails and hedge funds: investors push AirTran to keep pushing

It’s back the cliffs’ edge, gallery_80_lg.jpg and the story’s hero is hanging on by his fingernails….just when we thought the Midwest saga was over, it isn’t. About a day after Midwest’s board had announced a final, binding decision to sell out for $424 million in cash to private-equity giant TPG, the Texas Pacific Group, with Northwest Airlines included as a ‘passive’ investor, and all seemed settled, it wasn’t.

A number of Midwest shareholders questioned the Northwest role and just a day after AirTran said it was out of the game, it came back in with an again-sweetened bid “at the behest of Midwest shareholders”. Hedge funds, the anonymous investor groups that buy and sell stocks on the hopes that they’ll rise or fall steeply in special situations like buyouts, have played a role in the Midwest saga for months. One fund, Octavian Management has pleaded with Midwest to accept a deal with AirTran. The fund, which is a 7.4% owner of Midwest, has said a merger with AirTran would make “enormous strategic sense.” After the TPG deal, another fund, Pequot, an 8.8% owner of Midwest, claiming to be the biggest stakeholder in the airline, objected to the TPG deal, saying it presented potentially hobbling competitive issues. Midwest management said only that it would consider the offer at a board meeting, but couldn’t promise it would make a definite resolution. In making the new $445-million cash-and-stock offer, AirTran chairman and chief executive Joe Leonard said that “Midwest’s shareholders are concerned that the acquisition of Midwest by a private equity firm, 060523a_lg.jpg
along with Northwest Airlines, will block competition, raise fares, reduce employment levels and reduce service”. Midwest’s share of the Milwaukee market, a strong 52%, when combined with number-two Northwest’s 12% share, would present antitrust authorities with an issue, they said.

For AirTran, a second defeat in a bid to set up a second hub in the Midwest to compliment its Atlanta operations would be a bitter blow. AirTran had tried in late 2004 to buy the foundering ATA Airlines and take over its Chicago Midway hub, but was thwarted when another private equity firm, Matlin Patterson, bought out the former Amtran in a $100 million deal that included code-share partner Southwest Airlines. ATA now runs an operation that has boosted Southwest’s revenues sweetly.

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