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AirTran Mounts Midwest Bid

The offer values the target's equity at $290 million.
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Updated from 11:40 a.m. EST

AirTran Airways


has proposed a $290 million takeover of

Midwest Air


, as the consolidation trend in the airline industry spreads to smaller carriers.

The buyout effort, announced Wednesday, would "create a national low-cost, high-quality airline, coast-to-coast," said AirTran CEO Joe Leonard, on a conference call. "Both will be better and stronger than the companies standing alone."

AirTran proposed to purchase each of Midwest's shares outstanding for $11.25 in cash and stock. The offer represents a 37% premium to the 30-day average closing price, and Leonard said AirTran is willing to pay more "if we can find more value during the due diligence process."

Midwest shares soared 22.3% to close at $11.10, while AirTran rose 4.1% to $12.85.

Nevertheless, Midwest said it has no interest in the offer, calling it an "unsolicited, highly conditional expression of interest." Spokeswoman Carol Skornicka said the carrier has been evaluating offers from AirTran since the first bid in July 2005, which was for $4.25 a share.

Skornicka said the airline's board would meet later this week to discuss the latest approach, but added that her company is doing well right now on its own. "We've seen a return to profitability, and we have a business plan that is realistic and shows the potential for much greater upside for shareholders than the AirTran offer," she said.

Through the first nine months of this year, Midwest reported net income of $1.8 million, compared with a $51 million loss in the same period of 2005. Operating revenue was $496.2 million, up 30.5%, and third-quarter cost per available seat mile was 7.24 cents. The airline prides itself on offering premium service that includes leather seats and chocolate chip cookies baked onboard.

The AirTran offer comes amid a round of consolidation talk among the bigger carriers.

Continental Airlines


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, the parent of United, have

held exploratory talks about a merger, according to published reports.

On Nov. 15,

US Airways


mounted a hostile takeover of

Delta Air Lines


, and last week,

Northwest Airlines


said it had hired a merger adviser.

Leonard said he has been frustrated and puzzled by Midwest's resistance, especially given the premium and the willingness to pay more. "They're very proud of what they've accomplished and they should be, and

they think they can go it alone and be successful," he said. "We doubt that, frankly."

AirTran decided to go public with its interest because "our offer is so compelling that stakeholders have the right and deserve to know what is on the table," Leonard said. "We just felt that rather than fold our tent and go away, that the stakeholders ought to know what's there."

Leonard said a deal could close by the end of the first quarter. In an interview, AirTran CFO Stan Gadek said the airline "is not going to rule out any possibility" if the approach fails. "We want to keep this friendly," he said.

The offer provides that all Midwest employees, except for "a small number" of managers, would be guaranteed employment. The combined carrier would gain $60 million in synergies, largely because of stronger positions in its key cities and because it could replace Midwest's 11 aging MD-80s with fuel-efficient Boeing 737-700s. "To the outside observer, this is a natural," Leonard said.

Fleet compatibility is a key attraction. AirTran has 87 Boeing 717s, and Midwest has 25, making them the first- and second-largest operators of the now-discontinued aircraft type. Additionally, AirTran has 60 scheduled 737 deliveries over the next few years.

Also, both carriers could diversify while building their presence in their hubs. AirTran has an Atlanta hub and a focus city in Orlando. Midwest has a Milwaukee hub and a focus on Kansas City.

Currently, AirTran has 64% of its capacity in Atlanta, while Midwest has 83% of its capacity in Milwaukee. A combined airline would allocate 46% of capacity to Atlanta and 24% to Milwaukee, and would enable Milwaukee to eventually grow to about 200 daily departures, up from 140 today.

The combined carrier would have pro forma 2007 revenue of about $3 billion and around 1,000 daily departures.

Following the initial 2005 offer, Leonard wrote to the Midwest board of directors this past October with a revised proposal. After a series of communications between the principals and the companies' advisers, Leonard was informed on Dec. 7 that the Midwest board had declined the offer, AirTran said.

On Wednesday, Leonard sent another letter saying that AirTran would continue to pursue the merger.

AirTran said its financial advisers are Morgan Stanley and Credit Suisse.