Delta Would Have to Sell Takeover to Creditors

One of the biggest obstacles in US Airways’ path to a takeover of Delta Air Lines is selling Delta creditors on the advantages of US Airways’ $8 billion offer.

Bankrupt Delta faces a Feb. 15 deadline to submit a financial restructuring plan to the bankruptcy court, where individual creditors would then be in a position to either accept or reject the proposal.

After that date, US Airways or other companies could submit plans to pay off creditors as long as they could find a “sponsor” – one of the creditors – who would agree to champion their bid so they could intervene in the case.

In the end, it might boil down to who comes up with more pennies on the dollar to repay about 7,000 suppliers and contractors who are owed an estimated $16 billion in unsecured claims, according to several people who have followed the bankruptcy process closely.

Secured claims – held by banks and other investment firms – total about $11 billion.

US Airways made an unsolicited bid Wednesday to acquire Delta, a move that would create the largest airline in the country with flights to 350 cities and annual revenues of about $28 billion.

Delta, which has its second largest U.S. hub in Cincinnati and is the parent company of Erlanger, Ky.-based Comair, has said that it wants to emerge from bankruptcy by mid-2007 as a stand-alone airline, not as part of a company created by a merger with another carrier.

Airline consultant Michael Boyd said US Airways bid has to be looked at as “a money deal.”

“The constituencies now are the creditors. If creditors see a Delta plan that will give them 15 cents on the dollar and a US Air plan that will give them 20 cents on the dollar, these creditors don’t care if the combined entity lives or dies. They just want to get their money and get out,” said Boyd, who heads the Boyd Group in Evergreen, Col.

When it announced its plans on Wednesday, US Airways said its $8 billion cash and stock offer translated to 50 cents on the dollar to unsecured creditors. US Airways said that represents 25 percent more than the mid-week trading price of Delta’s unsecured claims – 40 cents on the dollar.

Bankruptcy attorney Darryl Laddin, who represented the trustee and the liquidating agent in the bankruptcy of Eastern Airlines, which shut down in 1991, said US Airways could potentially enter the case on behalf of the creditor committee, the nine-member panel that negotiates with Delta on behalf of all of its creditors.

An attorney for the creditor committee declined comment Thursday.

“They (US Airways) would need a major constituent to be their supporter,” said Laddin, who heads the bankruptcy and creditors’ rights division of Arnall Golden Gregory, an Atlanta law firm.

“Effectively, that’s what they’re trying to do – acquire Delta through the bankruptcy process. US Airways has made (unsuccessful) attempts to engage Delta management and as a result they’ve decided to use the public forum to make an appeal to the creditors in the case.”

Creditors will vote on approving a restructuring plan. To be ratified, a plan must be approved by a majority of the creditors who also represent at least two-thirds of the debt that must be repaid.

Laddin said filing bankruptcy takes the fate of Delta out of the hands of its management and its shareholders and transfers it to the hands of the bankruptcy court.