Mesa's Bid for Atlantic Dies - TheStreet

Mesa Airlines'

(MESA) - Get Report

unsolicited $525 million bid to take over

Atlantic Coast Airlines

( ACAI) ended Tuesday.

Mesa's bid to create the world's largest regional carrier failed after mounting antitrust concerns caused United Airlines parent

UAL

(UALAQ)

to back out of a memorandum of understanding with Mesa.

Late Monday, United said it would be canceling its memorandum of understanding to have a combined Mesa and ACA fly as a regional partner from its Dulles hub in Washington D.C. Under the memorandum, if Mesa were successful in its unsolicited bid for ACA, the company would be paid to fly as a United Express partner. But without this deal to fly for United, Mesa said it would be ending its bid.

"While we continue to believe the combination of Mesa and Atlantic Coast is in the best interests of the shareholders of both companies and we disagree with the court's antitrust conclusions, we understand United's decision and appreciate their need to move forward with plans to maintain service in their Dulles hub without the service of Atlantic Coast Airlines," said Jonathan Ornstein, Mesa's chairman and chief executive.

The beginning of the end of the deal came last week, when a pair of court rulings turned up the legal and political heat.

Late Thursday, U.S. District Court Judge Rosemary Collyer issued a temporary injunction, delaying Mesa's chance to have ACA's shareholders vote to replace ACA's board with members friendlier to the unsolicited offer. This was followed by an announcement from the Department of Justice, which said it had opened an antitrust investigation into Mesa's takeover bid, scrutinizing the relationship between UAL and Mesa to see if the pair colluded to thwart ACA's plan to become a low-cost carrier called Independence Air.

With United trying to emerge from bankruptcy protection -- and needing the federal government's help to do so via a $1.8 billion loan guarantee from the Air Transportation Stabilization Board -- the temporary injunction created too much uncertainty over who would serve as United's partner from Dulles.

"Given the uncertainty surrounding Mesa's consent solicitation created by the preliminary injunction issued in federal court on Dec. 18, the memorandum of understanding no longer provides a good basis for the purposes of United's ongoing business planning," said Doug Hacker, United's executive vice president of strategy, in a press release.

With Mesa's offer to pay 0.9 of its shares for a single share of ACA off the table, investors re-evaluated their positions in both carriers. Mesa, which has long-term growth plans in place to fly as a regional partner for United,

America West

and

US Airways

, rose 44 cents, or 3.4%, to $13.40 on the news. But ACA, which faces many challenges on its road to morph from a regional player flying smaller jets to a low-cost carrier flying larger ones, dropped 42 cents, or 5%, to $8.78.

"Today,

at ACA the other shoe drops. We expect continued selling pressure as deal-hungry arbs potentially stampede for the exit," said Jamie Baker, airline analyst at J.P. Morgan. "Considering that ACA's plan for Independence Air has developed meaningful potential since its July announcement, we would not expect shares to retest their prior low of $6.78." (J.P. Morgan has been a lead or co-lead manager of a debt offering from Mesa in the last 12 months.)

But as ACA's investors rush for the doors, Baker said that investors who believe in Independence Air could see an intriguing investment opportunity, especially if the correction in shares is pronounced.