WisBusiness: Analyst predicts Midwest board will reject latest AirTran offer

By Brian E. Clark
WisBusiness.com

Midwest Air Group’s board will most likely have a negative response tomorrow to the recent $13.25 per share offer from Florida-based AirTran Holdings, an analyst from Morningstar Inc. said today.

But Brian Nelson, who works for the Chicago-based provider of independent investment research, said he believes AirTran will ultimately be successful in its hostile takeover bid.

“We think there is a high probability of this deal going through,” he said. “It’s just a matter of getting shareholder acceptance of this offer, or perhaps a higher one if AirTran moves it up. But we think it will happen.”

Others also think AirTran’s bid may be pushed higher. In an investor’s note from Craig Kennison, an analyst with Robert W. Baird & Co. in Milwaukee, said his firm believes Midwest shares could be worth as much as $14 and that shareholders might want even more.

Carol Skornicka, Midwest’s senior vice president for corporate affairs, confirmed that her company would respond to AirTran’s Jan. 11 offer of $13.25 a share by Thursday afternoon.

She said she is prevented by federal law from commenting on how the board will react. “We are in a quiet period now,” she said. “All I can say is it is a complicated process.”

In rejecting the first offer of $11.25, Midwest said the airline had more value as a stand-alone company.

In addition tomorrow, Midwest will release its fourth-quarter and total year earnings report. But Skornicka said that is unrelated to the AirTran bid. She said Midwest CEO and President Tim Hoeksema will not discuss the takeover attempt when he does a Web cast at 10 a.m.
Midwest posted a $1.7 million profit for its third quarter.

Also on Wednesday, AirTran CEO Joseph Leonard fired off another letter to Midwest shareholders, touting the $13.25 offer and urging them to put pressure on the Midwest board to sell.

In the missive, he said AirTran is a much stronger company than Midwest and that Midwest’s prospects for growth are weak. AirTran’s bid expires Feb. 8. In earlier comments, he called the Midwest board’s rejection of his advances “bizarre.”

Midwest shares closed Wednesday at $12.76, down from a 52-week high of $14.14. Before AirTran made public its takeover intentions late last year with an offer of $11.25, Midwest shares were trading at around $9.

Nelson said he continues to believe AirTran and Midwest would be a good combination because of the similarities of their airplane fleets and because there is no overlap of their flight schedules. He said he is not aware of any other airlines that might be interested in buying Midwest.

“I know that Midwest management has been aggressive in fighting the takeover, but it will ultimately come down to shareholders putting pressure on the board.

“That could happen with a sweetened offer, but they might not want to quarrel over what amounts to pennies,” he said, noting that even with a “poison pill” provision, the Midwest board cannot forever withstand shareholder pressure.

The so-called poison pill, which has been challenged in court by a Texas stock holder, allows the Midwest board to increase the number of total shares if an individual or institution acquires 15 percent of its stock.

Nelson called the Milwaukee market “relatively underserved” by airlines and said if AirTran or another carrier decides to move into it, it could hurt the value of Midwest.

He also dismissed a recent letter by Sen. Herb Kohl to Leonard threatening a federal investigation of AirTran’s takeover efforts.

“Again, this ultimately comes down to shareholders considering what is in their best interest,” he said. “We think this is a great opportunity for them.”

Ironically, those who have fought the takeover stand to gain significantly from a sale to AirTran. They are Midwest executives, who would, however, presumably lose their jobs if the airlines were merged.

According to federal Securities and Exchange Commission, Hoeksema has 160,600 shares of Midwest stock. He would receive more than $2 million from AirTran’s $13.25 offer. Additional stock options would mean more. Skornicka, who is also the airline’s general counsel, has 33,000 shares worth nearly $450,000 at $13.25 each; Christopher Stone, senior vice president, has about 25,000 shares worth nearly $330,000; and David Reeve, senior vice president, who has more has 28,000 shares worth nearly $375,000. Board director Frederick Stratton Jr., has almost 60,000 shares worth nearly $800,000.

If they can force AirTran to increase its bid, their portfolios would be worth even more. At $14 a share, Hoeksema’s holdings would be worth roughly $2.25 million.