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Northwest Secures Stronghold

By keeping AirTran away from Midwest, its Minneapolis and Detroit hubs appear to be safe.
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CHARLOTTE, N.C. -- The apparent winner in the battle for Milwaukee is

Northwest Airlines

(NWA)

.

The Minneapolis-based carrier says it will be a passive investor in the group formed by TPG Capital to acquire Milwaukee-based

Midwest Air

(MEH)

. A final agreement on the $16-a-share offer is expected by Wednesday, Midwest said.

The all-cash offer trumps a bid by

AirTran

(AAI)

, which had pursued Midwest for two years. AirTran's final proposal was for $431 million, or $15.75 a share in cash and stock.

That deal would have allowed the industry's lowest-cost major airline to establish a hub 300 miles southeast of Northwest's Minneapolis hub and 250 miles west of its Detroit hub, neither of which it wanted to see happen.

"This is a smart move for Northwest," said Morningstar analyst Brian Nelson. "Their network is dependent on preventing low-cost proliferation, and this prevents a very large move by AirTran in Milwaukee."

It's unclear for now what the Justice Department might do. Nelson suggests that because Northwest will be a passive investor, approval is likely. But AirTran CEO Joe Leonard said, in a prepared statement, that Northwest's involvement "will surely raise antitrust concerns, casting doubt for shareholders on whether a transaction can, in fact, close."

Through a letter to Midwest directors, TPG said it doesn't foresee any difficulty in obtaining antitrust clearance "or any other regulatory approvals."

Investors would have a better idea what the Justice Department might do, says aviation consultant Robert Mann, if the department had reviewed the proposed merger between

Delta

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(DAL) - Get Delta Air Lines, Inc. Report

and

US Airways

(LCC)

.

That situation had US Airways attempting to merge with a major competitor. But in January, Delta creditors turned their thumbs down before an antitrust review could occur.

Currently, Midwest has about 50% of the Milwaukee market, while Northwest is second with about 20%. The Delta/US Airways deal "looked a lot less insidious than this one, so I don't know how much traction it will get with DOJ," Mann said. "But if you look at this laissez-faire administration, they have never seen a deal they didn't like."

Northwest has not disclosed what share of Midwest it would hold. In an interview with the

Milwaukee Journal-Sentinel

, Midwest Senior Vice President Carol Skornicka said: "At one time it looked like it would be around

40%, but we honestly do not know at this time."

AirTran had repeatedly said it had big plans for Milwaukee. It was willing to pay a high price because, like US Airways in the 1990s, it is an East Coast carrier seeking a Midwest hub so that it might become a national carrier. With dozens of new Boeing jets on order, AirTran would likely have rapidly expanded in Milwaukee, which now faces a future as a secondary market that will not threaten Northwest's established hubs.

Analysts including Nelson of Morningstar and Ray Neidl of Calyon Securities say the collapse of its deal is neutral for AirTran. "They pushed their limit in terms of repeatedly raising their bid," Nelson said.

A longtime airline investor, TPG Group has invested in

Continental

(CAL) - Get Caleres, Inc. Report

and America West Airlines. It also bid unsuccessfully for US Airways during the carrier's first bankruptcy.

Still, various analysts questioned what it will gain from the Midwest arrangement, and the company declined to comment.