Midwest's board announced in mid-August a final, binding decision to sell out to private equity giant Texas Pacific Group (TPG), with Northwest Airlines included as a "passive" investor. Its $450 million all-cash plan was preferable to Midwest than AirTran's final cash and stock offer worth $445 million.
The Northwest role in the deal has raised doubts, and some Midwest shareholders are publicly questioning the deal. Midwest's share of the Milwaukee market, a strong 52%, when combined with number two Northwest's 12% share, could present antitrust problems.
Northwest says it will not participate in the management of Midwest and insists it is only "providing financing to facilitate the transaction". It will "explore cost-reduction activities such as joint fuel-purchasing". In May, Northwest forged a codeshare with Midwest.
American Antitrust Institute president Albert Foer says: "I don't see how Northwest can invest 'passively' in a rival." Raymond James & Associates analyst Jim Parker suggests Northwest is only using TPG as "a front" to buy Midwest and keep AirTran's low-fares competition out of its home region.
The amount of Northwest's proposed stake in Midwest is not clear, but some put it near 40%. Nearly a decade ago, Northwest acquired a significant investment stake in Continental but antitrust regulators forced it to give it up.
After Midwest initially accepted a $424 million offer from TPG, AirTran "at the behest of Midwest shareholders" raised its offer from just over $400 million to $445 million. But it appears it will not yet again renew its attempt to take over the smaller carrier. AirTran chief executive Joe Leonard says his company accepts the Midwest decision even though the combination would have created a truly national low-cost carrier. He says AirTran will continue on its own growth plan, which has been profitable. "AirTran doesn't need to merge with any other carrier to achieve our business goals," he says.
JP Morgan analyst Jamie Baker suggests AirTran does not need Midwest and will seek larger deals within the next two years. AirTran had tried in late 2004 to buy ATA Airlines and its Chicago Midway hub, but private equity firm Matlin Patterson instead purchased the carrier in a deal including codeshare partner Southwest Airlines.
Leonard's long-running pursuit of Midwest had presented two differing beliefs in the future of smaller carriers. AirTran insisted a low-fares, high-growth model was the only way to survive, but Midwest, noted for its leather seats, baked-on-board cookies and higher service levels, insisted service would win. Midwest board chairman Tim Hoeksema says: "TPG shares our commitment to quality and truly understands the value of a differentiated product."
The TPG deal still requires approval of both the competition authorities and Midwest's shareholders but is final and definitive because, according to TPG, "all financing has been committed and no debt financing is required".
The TPG offer shows again the power of private equity. TPG is part of a British Airways-led group mulling a bid for Iberia and was a key player in a massive but ultimately unsuccessful bid for Qantas. TPG also backed Continental's reorganisation in the 1990s.