Delta files standalone plan; board unanimously rejects US Airways' merger proposal

By Caroline Salls and Jennifer Lanning Drey

Pittsburgh and Portland, Ore., Dec. 19 - Delta Air Lines, Inc. filed a standalone plan of reorganization Tuesday with the U.S. Bankruptcy Court for the Southern District of New York and announced that its board of directors unanimously voted to reject US Airways' unsolicited merger proposal.

"After a very careful, thorough review, the board concluded that Delta's plan would provide creditors with superior value and significantly greater certainty of execution and on a much faster time table than the US Airways proposal," Delta chief executive officer Jerry Grinstein said during a conference call held Tuesday.

The company said it intends to emerge from Chapter 11 bankruptcy in the spring of 2007.

Delta said financial adviser The Blackstone Group estimates a $9.4 billion to $12 billion consolidated equity value for the company, as opposed to US Airways' $8.4 billion proposal.

Delta's board said it determined that the US Airways proposal is structurally flawed, because it:

• Has an unacceptably high risk of not achieving antitrust clearance because the US Airways proposal would harm consumers and communities;

• Has overwhelming labor issues precluding attainment of claimed synergies. Specifically, Delta said its own contracts would prohibit the capacity reductions that are the economic foundation of the proposed transaction;

• Depends on achieving "synergies" that are premised on faulty economic assumptions;

• Would result in a company with more than $23 billion in debt;

• Would reverse Delta's progress and erode the value of the Delta brand; and

• Would expose Delta to merger-related risks, as US Airways continues to experience significant integration problems and has not completed its previous, much smaller merger with America West.

"We do not believe this proposal will create the most profitable network carrier with the lowest labor costs as US Airways claims," Delta executive vice president and chief financial officer Edward Bastian said in a company news release.

"Labor integration and fleet complexity alone would substantially increase costs. The proposal overestimates synergies while downplaying the impact of trying to achieve them at the expense of our people, the traveling public, and the communities we serve."

Although it has been suggested that Delta pursue a dual path of continuing discussions with US Airways while also pursuing its standalone plan, Grinstein said the company is not willing to pursue a dual route because it would require sharing certain information with US Airways, its largest competitor on the East Coast.

"It does not make sense to initiate that process for a deal we believe will never happen," he said.

In addition, Grinstein said pursuing a dual path would slow the company's momentum and be likely to delay its expected emergence from bankruptcy in the spring.

"Now that Delta's board of directors and management have rejected the US Airways proposal, we trust [US Airways' chairman and CEO] Doug Parker will keep his word and cease pursuing his proposal so our respective organizations can return to competing vigorously in the marketplace."

US Airways' response

In a US Airways news release, Parker said, "We have always expected that Delta would file a standalone plan with the bankruptcy court. This plan will provide Delta creditors with a benchmark against which to evaluate the competing proposals and we welcome that comparison.

"This is an important step in a process that we believe will result in the merger of US Airways and Delta.

"Combining US Airways and Delta will create at least $1.65 billion in annual synergies beyond the value that could be created by any standalone plan. These synergies come on top of the certainty of $4.0 billion in cash and the upside potential of 78.5 million shares of US Airways stock.

"Factoring the synergy benefits into our offer, the current value of our proposal is significantly greater than the value of Delta's standalone plan.

"We remain a disciplined and determined bidder for Delta. We continue to work productively with the creditors committee and the ad hoc bondholder committee. Finally, we recognize and appreciate the creditors' ultimate authority in this process."

Five-year business plan

According to another Delta news release, the disclosure statement for the company's plan of reorganization includes an overview of Delta's five-year business plan, which projects:

• Operating margins from 8.0% in 2007 to 10.5% in 2010;

• EBITDAR margins from 15.7% in 2007 to 17.8% in 2010;

• More than 50% reduction in net long-term debt, to $7.5 billion in 2007 from about $17 billion in 2005; and

• A return to profitability in 2007 and an increase in net income, after profit sharing, to $1.2 billion in 2010 from roughly $500 million in 2007.

The Blackstone Group's estimated company valuation would result in a 63% to 80% recovery for Delta's unsecured creditors, the release said.

Under the plan of reorganization, unsecured creditors will receive distributions of new Delta common stock to settle their claims, and current holders of Delta common stock will receive no distribution, with those securities to be canceled on the plan effective date.

Also under the plan, Delta will roll its $2.1 billion in debtor-in-possession financing into a new financing package that would go into effect when Delta emerges from Chapter 11.

Delta said it has received multiple proposals with competitive terms and conditions for this exit financing.

According to the disclosure statement, the plan is based on the limited and separate consolidation of the Delta debtors' estates with one another and the Comair debtors' estates with one another, solely for plan voting, confirmation and distribution purposes.

Proposed creditor treatment

Treatment of creditors under the plan will include:

• Holders of other priority claims against the Delta and Comair debtors will recover 100% in cash;

• Holders of secured aircraft claims and other secured claims against the Delta and Comair debtors will recover 100% in either cash, reinstatement of the claim, proceeds from the sale of the collateral securing the claim or return of the collateral;

• Holders of general unsecured claims against the Delta debtors will recover 63% to 80% in new common stock and will receive an opportunity to participate in a new equity investment rights offering;

• Holders of general unsecured claims against the Comair debtors will receive new common stock from the Comair unsecured allocation and the right to participate in the equity investment rights offering, for an unknown recovery amount;

• Holders of non-convenience class retiree claims against Delta will recover 63% to 80% in either new common stock, or if elected on the plan ballot, cash proceeds from the sale of their share of the Delta unsecured stock allocation;

• Holders of convenience class claims against the Delta debtors will recover 63% to 80% in cash determined with reference to the midpoint of the range of recovery estimates for general unsecured claims;

• Holders of convenience class claims against the Comair debtors will receive cash determined with reference to the midpoint of the range of recover estimates for Comair general unsecured claims, for an unknown recovery amount;

• Holders of interests in the Delta subsidiary debtors and interests in the Comair debtors will retain their interests; and

• Holders of interests in Delta and securities litigation claims against the Delta debtors and Comair debtors will receive no distribution under the plan.

Cash component

Delta executives said during Tuesday's call that they are still making decisions regarding the cash component to the distributions outlined in the plan and that the company has not yet established how it will use cash generated through the planned rights offering.

"We're anxious to hear from the market as to the importance of the cash component to the creditors and by filing the plan, we'll now have the process to begin those conversations," Bastian said.

The company's comments were in response to questions raised by analysts on the call asking the executives how they account for the fact that the US Airways proposal provides cash for unsecured creditors.

"[US Airways'] cash is contingent on getting approval, and we believe not only will it take a long period of time - at least 12 months - but it's very doubtful that approval could be obtained. So the cash has a very high risk factor associated with it," Grinstein said.

Anti-merger petition

According to a union news release, Delta Air Lines executives, the chairman of the Delta Master Executive Council of the Air Line Pilots Association and a Delta board council representative plan to publicly say 'no' to US Airways' "hostile takeover bid" by signing the "Keep Delta My Delta" petition.

Delta said community leaders also were scheduled to gather with Delta people in nine cities across the country to share concerns about the potential negative impact the takeover attempt could have on communities, including fare increases, job losses and fewer travel choices.

Delta, an Atlanta-based airline, filed for bankruptcy on Sept. 14, 2005. Its Chapter 11 case number is 05-17923.

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