AirTran Keeps Heat on Midwest

Midwest holders vote this week on three board seats.
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Two years have passed since

AirTran

(AAI)

approached

Midwest

(MEH)

about a merger, and it was six months ago that it publicly disclosed the effort.

But a resolution still appears to be months away.

Midwest's annual shareholders' meeting is scheduled for Thursday. Votes will be tabulated in a contest for three board seats, and it appears that candidates backed by AirTran stand a good chance of taking them all.

Meanwhile, AirTran says its tender offer for the company has been accepted by holders of more than 14.6 million Midwest shares, or 59.5% of the total.

Three directors cannot dominate a nine-member board, Midwest pointed out Monday. Additionally, the carrier said that even if AirTran gains control of a majority of its shares, board approval would be required for an acquisition to occur.

Nevertheless, the dynamics are bound to change if the AirTran trio is elected, says industry veteran Bob McAdoo, an airline analyst for Prudential Equity until the business was closed last week.

"Theoretically, if you have three outside board members, they could be outvoted 6-3," McAdoo says. "But I don't think that is the way boards operate. Three new directors may bring data to the other directors that is a little different than what they've been getting from the investment bankers. So it's hard to imagine a straight 6-3 split going forward."

In particular, McAdoo notes the AirTran slate includes Jeffrey Erickson, former president of TWA, Reno and Midway airlines.

"He will ask questions, and he will cause questions to be asked that probably haven't been asked before," McAdoo says. "That alone will cause the dynamics to change."

Midwest reiterated its view that shareholders would benefit from awaiting the results of the strategic plan it's implementing.

The company is adding two MD-80 jets, a 50-seat regional jet program, more seating and an expanded codeshare agreement with

Northwest

(NWA)

. The changes could boost revenue by about $250 million annually, Midwest believes.

In a report Monday, Calyon Securities analyst Ray Neidl reduced his second-quarter and full-year estimates for AirTran, saying rapid growth is pressuring yields and increasing the urgency to diversify by acquiring Midwest.

"AirTran will continue its pursuit since we believe it is vital to future growth prospects," Neidl wrote in a research note.

Although a poison pill provision means Midwest can continue to block a deal even if AirTran elects three directors, the election "may shift the opinion of Midwest management regarding the merger," Neidl wrote. "Regardless, we believe the saga will continue through the summer and possibly longer."

AirTran, which is offering $389 million or about $15 a share for Midwest, extended its tender offer until Aug. 10 to allow a new board to evaluate its bid.