Shareholders stand to lose in Delta deal

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ATLANTA --- Weary shareholders and creditors of Delta Air Lines Inc. and Northwest Airlines Corp. could lose out amid falling stock prices since the carriers announced their intent to combine.

A bidding war for either of the airlines initiated by a third-party such as another carrier or a private equity firm could help. But observers say that's not likely, given the risky business of investing in airlines.

Soaring fuel prices have hit all airline stocks hard, but especially in the case of Delta and Northwest after they said this week they do not plan to cut capacity any further or to close any of their hubs.

That approach might make it hard for the companies to realize their goal of "earning a return for shareholders who have committed their capital." Analysts predict Delta and Northwest will have to cut more capacity.

"In an environment of $115-a-barrel oil, much more is going to need to be done to restructure the industry," said Calyon Securities airline analyst Ray Neidl.

The two airlines' shareholders and creditors, who include employees and big mutual funds, have suffered years of losses.

The shares that existed before Delta and Northwest filed for bankruptcy in 2005 were canceled when the two carriers emerged from Chapter 11 last year, wiping out any hope those holders would recover their losses.

The airlines paid back fractions of the billions of dollars they owed creditors in their bankruptcy cases with new shares that have lost more than half their value in the past 12 months. Some creditor claims have yet to be resolved.

Now, Delta wants to acquire Northwest in a stock-swap deal that carries no cash payout nor the U.S. flight cuts Wall Street was expecting.

Ads promoting the deal ran in major newspapers Friday, a Web site was created touting the global presence of the combined airline, and executives at both airlines have been talking up the deal in major cities where they operate.

But Delta shares have slumped roughly 17 percent since the Monday announcement. The stock movement has shaved about $600 million off the value of the deal to Northwest shareholders, who would get 1.25 Delta shares for every Northwest share they own.

Delta Chief Executive Richard Anderson, who will head the combined airline, said during a stop in Salt Lake City on Friday that the companies view the combination as a long-term strategic move.

"This isn't about a short-run combination," Mr. Anderson said. "This is about the long run, and ... I think we'll be successful in showing people that the combination of the two carriers creates a much more durable enterprise and that we can do a much better job of providing returns over the long run."

The problem partly involves the delicate balancing act that the executives are trying to perform.

They must assure employees that job cuts will be limited and seniority will be protected. Communities must be assured they are not going to lose service. The pitch to regulators: There will still be competition after Delta absorbs Northwest. Then there are shareholders, who need to be assured the deal will make them money.

The companies didn't rule out further capacity cuts in the future if fuel prices continue to rise.

"They still have some flexibility. Not full flexibility, but some," said Standard & Poor's analyst Philip Baggaley.

STOCK-SWAP EFFECTS

THE DEAL: Delta wants to acquire Northwest in a stock-swap deal that carries no cash payout nor the U.S. flight cuts Wall Street was expecting. The airlines are trying to sell the deal to regulators and investors.


THE EFFECTS: Delta shares have slumped roughly 17 percent since the late Monday announcement. The stock movement has shaved roughly $600 million off the value of the deal to Northwest shareholders, who would get 1.25 Delta shares for every Northwest share they own.


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