pushing forward with its hostile takeover of
Atlantic Coast Airlines
( ACAI), but a UBS Warburg analyst warns that the deal is unnecessary for Mesa shareholders, bad for ACA shareholders -- and unlikely to happen.
In a research note Monday, UBS analyst Robert Ashcroft also told investors that
, parent of United Airlines, may try to wield some influence over the merger plan by moving to protect its all-important business at Dulles Airport in Washington D.C. On Friday, United said that it was working within "days, not weeks" to negotiate terms to have Mesa replace ACA as its United Express partner out of Dulles.
"We believe United when it says it is not the puppet master behind
the merger bid. But we believe United should now take control and direct the outcome to its best advantage," said Ashcroft, in his note. "If it does not, and the merger is consummated, we believe ACA shareholders will be disappointed in the price they receive and Mesa shareholders will be worse off."
In Ashcroft's view, the best -- and most likely -- outcome of the takeover bid is that ACA emerges as an independent entity that has aborted its plan to reinvent itself as a low-cost carrier. While Mesa will be successful in replacing ACA's board, ACA won't rush to merge with Mesa and instead, Ashcroft predicts, will pull an about-face and return to form as a regional player flying as United Express from Dulles.
The analyst said this turn of events -- one where Mesa is left without a merger partner and ACA is once again independent -- would be best for United because a combined Mesa and ACA pairing would have a dominant share of its regional business. With such a concentration of business into one set of hands, United could find itself at Mesa's mercy when it comes time to negotiate contracts.
Ultimately, he feels an independent ACA would benefit Mesa, too.
"In our opinion, Mesa shareholders are better off without the merger. Mesa cites synergies, but in growth terms, Mesa is a speedboat, ACA a barge," said Ashcroft. "Linking high cost, but likely growthless, ACA to high growth, but low cost, Mesa, dilutes Mesa shareholders."
Indeed, Ashcroft maintains that Mesa will have pro forma earnings-per-share growth of 64% in fiscal 2004 and 50% in 2005 if it goes alone. In comparison, if the company were to succeed in its hostile takeover of ACA, EPS would grow by 23% in fiscal 2004 and fiscal 2005. As an added bonus, Mesa wouldn't have to battle ACA's pilots, which recently came out against the takeover, agreeing to cut their own pay if ACA were to remain independent.
In the end, Mesa could be better off by trying to merge and failing. Ashcroft said United could reward Mesa with better contract terms for stepping aside after doing the dirty work and replacing ACA's board.
"If United pays Mesa for enabling a deal with an independent ACA, our target price is $18. This assumes incremental growth of 24 50-seat regional jets above Mesa's already torrid growth," said the analyst. "United would owe Mesa a considerable debt, which could be paid in many ways, including potentially an increase in Mesa regional jets."
While Ashcroft put the likelihood that ACA would become an independent carrier at 55%, it's worth noting that the takeover process will likely take a while and airline experts aren't always able to see dramatic turns of events coming. In April, few analysts saw
unit American Airlines dodging bankruptcy. Six months later, American posted a $1 million profit for the third quarter.
Given United's self-imposed timeline, a memorandum of understanding with Mesa to fly regional jets could be announced this week. But until ACA shareholders vote on whether to replace ACA's board of directors, all three airlines and their stakeholders will have to wait and see if Ashcroft's predictions hold water.
On Monday, shares of Mesa dropped 14 cents, or 1.4%, to $10.4, while shares of ACA dropped 3 cents, or 0.3%, to $10.83.