Takeover nears Inevitability, Analysts Say; Midwest's Cookie Crumbling

If you enjoy the wide, leather seats on Midwest Airlines, you might want to book them soon.

AirTran Holdings Inc. appears to have turned a corner in its hostile takeover bid for Midwest Airlines, announcing Thursday that nearly 57% of Midwest Air Group Inc.'s shares have been tendered to AirTran.

That doesn't mean AirTran has acquired the shares, but rather those shares have been pledged to AirTran for its attempted takeover.

Midwest executives pooh-poohed the announcement, with one saying they amount to "a straw poll" and not a binding referendum on the company's future. Also, Midwest Air could invoke a "poison pill" provision to make AirTran's takeover attempt more difficult, and seek refuge in a state anti-takeover law.

But several airline industry analysts and consultants said AirTran has gained the higher ground in a battle that first surfaced publicly in December.

"I think it's fair to say it's inevitable" that AirTran will acquire Midwest Air, said Brian Nelson, an analyst at Chicago-based Morningstar Corp. But it could still take AirTran a long time to complete the transaction if Midwest Air's board continues to rebuff the offer, he said.

" 'Inevitable' might be too strong of a word, but I do think the likelihood is increasing," said Scott Hamilton, who operates Leeham Co., an aviation consulting firm based in Issaquah, Wash. Hamilton said Midwest Air's directors and officers will be forced to listen to the majority of shareholders, or risk being sued.

"The news makes it much more likely that AirTran will ultimately be successful in acquiring Midwest," wrote Jim Corridore, an analyst with New York-based Standard & Poor's Equity Research, in a note to investors. "However, Midwest can still get regulators and legislators to try to halt the takeover."

Carol Skornicka, Midwest Air senior vice president, had a different view.

"The tender offer is a straw poll, if you will, kind of a beauty contest to give people an opportunity to respond to the offer," Skornicka said. "But, the board retains control."

AirTran Chairman Joseph Leonard wants to buy Midwest Air, corporate parent of Midwest Airlines and Midwest Connect, and greatly expand flights out of Milwaukee. AirTran says it can do that by dropping most of Midwest Airlines' wide, two-across seats and replacing them with narrower two-by-three seating. AirTran says it will fit more passengers in those planes, and increase flights, by cutting fares - a move aimed at Chicago-area travelers as well as those in southeastern Wisconsin.

"Low fares stimulate demand, and when you add demand you have additional jobs that are created," Morningstar's Nelson said.

Midwest Air Chairman Timothy Hoeksema doubts AirTran's plan would work over the long term, and has questioned AirTran's pledge to increase the Milwaukee-area work force. Hoeksema has instead pushed a strategy of growing Midwest Air through a more gradual, less ambitious expansion.

To push its bid, AirTran is extending the tender offer until June 8. As of the close of business on Wednesday, shareholders had agreed to tender more than 13.9 million shares, or 56.6% of all outstanding shares, AirTran said.

AirTran's cash and stock offer was worth $16.08 a share, based on Thursday's closing price of AirTran stock, which was $12.12 a share, up 33 cents. The AirTran offer was a 3.7% premium to Midwest's closing price of $15.50 a share, up 40 cents.

Defenses available

Oak Creek-based Midwest Air's poison pill provision allows the company to flood the market with shares if an unwanted suitor acquires too much of its existing stock through a tender offer.

Also, state law provides protection for Wisconsin corporations fighting hostile takeover bids.

But, the poison pill would raise the number of shares for owners who have agreed to AirTran's offer, as well as for those shareholders opposed to a sale.

And, with a majority of Midwest Air shares pledged to AirTran, pressure is building on the board, wrote Craig Kennison of Robert W. Baird & Co. in an investors note.

That pressure will likely increase if three board candidates nominated by AirTran - John Albertine, Jeffrey Erickson and Charles Kalmbach - are elected by shareholders at Midwest Air's annual meeting on June 14. The AirTran slate would make up one-third of the board.

On Wednesday, Midwest Air sent a letter to shareholders urging support for three Midwest Air directors: John Bergstrom, James Boris and Frederick Stratton.

Leonard said Hoeksema and other Midwest Air executives should view the tender results "as a serious vote of no-confidence in Midwest's risky go-it-alone plan, and a clear message from Midwest's shareholders to meet formally with AirTran to discuss the terms of a merger agreement with the goal of combining the two airlines without waiting for the results of our proxy contest."

"We agree with Midwest that the shareholders should decide what they want for their company," Leonard's statement said. "Let the shareholders decide and since it has offered that choice, let Midwest respect and act on that choice."

However, AirTran's offer hasn't changed, so there's no reason for the board to reassess that bid, said Midwest Air's Skornicka.

The board has rejected AirTran's offer as being inadequate and failing to take into account the long-term value of Midwest Air. Skornicka also said the directors have information about Midwest Air's outlook that is not publicly available.

An example came later on Thursday, after trading closed, when Midwest announced an agreement with Northwest Airlines to sell space on each other's flights.

Octavian Advisors LP, which owns 6.6% of Midwest shares and is its largest shareholder, said the time had come for Midwest to talk with AirTran.

"We do not believe going through a proxy contest at the annual meeting - a contest that Midwest appears likely to lose - is the best way to combine these two great airlines," Richard Hurowitz, CEO of Octavian, said in a statement. "The time has come for this transaction."

Midwest Air management and directors seem "more interested in protecting their jobs and positions than representing the shareholders, who are the ones that actually own the company," Leeham's Hamilton said.

Copyright 2007, Journal Sentinel Inc. All rights reserved. (Note: This notice does not apply to those news items already copyrighted and received through wire services or other media.)

News stories provided by third parties are not edited by "Site Publication" staff. For suggestions and comments, please click the Contact link at the bottom of this page.