Tuesday, August 14, 2007
Midwest Air Group, owner of Midwest Airlines, yesterday announced that it had determined to pursue an all-cash offer from TPG Capital, L.P. to acquire all of the outstanding shares of Midwest for $16.00 per share in a transaction valued at about $424 million. Midwest and TPG expect to execute an agreement by tomorrow, August 15. Midwest did not disclose it at the time, but it subsequently was reported that Northwest Airlines would be an investor in this transaction with "no management role" in the operations of Midwest. Miudwest's announcement comes on the heels of AirTran Holdings Inc.'s weekend disclosure that it had allowed its own "hostile" cash and stock offer valued at $15.75 a share to expire.
The market is still uncertain about the prospects of a completed deal. On the announcement, Midwest's stock actually closed down 1.62% yesterday at $14 a share. To understand why, one need only read this excerpt from a letter delivered yesterday to the Midwest board from its largest shareholder (8.8%) Pequot Capital:
We have significant concerns with this Board’s decision to pursue an all-cash proposal from a private equity firm and its consortium. We are not convinced that this taxable, all-cash indication of interest is superior to the enhanced cash and stock offer that you indicated was made by Airtran this past weekend. In addition, we fail to see how TPG and Northwest will be able to match the job creation and growth opportunities promised by Airtran for the benefit of Midwest’s employees, suppliers, customers and communities.
Midwest's behavior throughout this transaction has been problematical. Their scorched earth policy has produced clear benefits -- Midwest's initial bid was $11.25, but their "just say no" policy to AirTran has highlighted the problems with anti-takeover devices and their potential use to favor suitors. Midwest management may have succeeded in preserving their jobs with this gambit, but it may be to the detriment of its shareholders.
It is also to the detriment of AirTran. AirTran has now incurred significant transaction costs, including lost management time expended on this transaction, and, assuming the bidding is done, now has nothing to show for it: TPG is a free-rider on AirTran's efforts. Here, I must admit I am a bit puzzled as to why AirTran did not establish a toe-hold; that is a pre-offer purchase of Midwest shares. If they had taken this route, AirTran would have paid for its expenses through its gain from this pre-announcement stock purchase. But instead, AirTran purchased only a few hundred shares for proxy purposes. This may have been due to regulatory reasons, but if not, it appears to be poor planning by AirTran. And AirTran is not alone. Toeholds are common in Europe (KKR recently used the strategy quite successfully in the Alliance Boots Plc transaction), but in the United States they are less utilized due to regulatory impediments such as HSR filings and waiting periods, Rule 14e-5 which prohibits purchases outside an offer post-announcement, and Schedule 13D ownership reporting requirements. Consequently, one study has found that at least forty-seven percent of initial bidders in the United States have a zero equity position upon entrance into a contest for corporate control. M&A lawyers may do well, though, to advise bidders to rethink this hesitancy. For more on this issue, see my post, The Obsolescence of Rule 14e-5.