A CSFB analyst said Monday that
Atlantic Coast Airlines
( ACAI) may be in jeopardy if Mesa doesn't quickly sign a key deal with United regarding service from Washington's Dulles airport.
In essence, CSFB's Jim Higgins said that Mesa's ability to buy ACA -- or offer a premium -- depends on contract terms offered by
unit United regarding Dulles service. United, which began looking for a regional carrier to feed traffic at the Dulles hub after ACA declined to restructure its current deal, is looking to line up its regional partners in hopes of emerging from bankruptcy by a stated goal of March 31, 2004.
"The odds that the Mesa deal will go through may be slipping. The absence of a quick pact between Mesa and UAL on terms of flying ACA capacity is unsettling, although we believe Mesa wants ACA and is willing to pay up somewhat to get it," said Jim Higgins, analyst at CSFB, in a research note.
On Oct. 24, United's Finance Chief, Jake Brace, had said the carrier hoped to have a contract signed with Mesa "as soon as possible." Eleven days after the comment, there's still no deal.
"An acceptable pact with United ... is crucial to Mesa's willingness to move ahead with the deal," said Higgins. "Unfortunately, despite logic that suggests United's risk and switching costs of bringing in new feed at
Dulles are significant if ACA goes its own way ... UAL should therefore try very hard to convince Mesa to move ahead with its deal to buy ACA; that is not clearly the direction we are seeing."
Indeed, United is under pressure not only to find a partner in Dulles hub, but to do it at much cheaper rates, which is the main reason why ACA walked away from United and announced plans to reinvent itself as a low-cost carrier. In its release of third-quarter results, United said it "expects to achieve significant savings from a number of renegotiated and new contracts with its United Express carrier partners."
But if United is too stingy, Higgins warned, the carrier runs the risk of shooting itself in the foot and losing whatever competitive advantage it could gain by a MESA and ACA hookup.
"A public campaign on United's part proclaiming numerous feeder options at Dulles and other tidbits that suggest the Mesa/United talks are going less than smoothly raise the risk that Mesa could walk away from ACA," said Higgins.
And if Mesa walks away, Higgins said, ACA shares will likely plunge as investors lose out on a deal that valued one share of ACA at 90% the value of one Mesa share -- a 25% premium when it was announced a month ago. While ACA shareholders control the fate of the company with their decision over whether to replace ACA's board with Mesa friendly directors, United is actually in the driver's seat.
Given ACA's recent lawsuit against Mesa that maintains United is the real force driving the takeover bid, it's ironic that contract talks between Mesa and United may have hit a rough patch. In the end, United may control ACA's future, but in an indirect manner. As negations drag on for weeks instead of days, it appears a regional jet contract to fly from Dulles may determine the fate of three airlines.
CSFB said it expects to receive or intends to seek "investment banking-related compensation from the subject companies within the next three months."
On Monday, shares of Mesa and ACA both stumbled, with Mesa down 30 cents, or 2.8%, at $10.47, and ACA down 43 cents, or 3.9%, at $10.73.