A day after
announced an unsolicited bid to purchase
Atlantic Coast Airlines
( ACAI), Wall Street analysts were conflicted on whether the offer will meet with success.
Some on Wall Street told clients that they think Atlantic Coast will be able to fight off Mesa's bid, which prices Atlantic Coast shares at a 25% premium to last week's close. But because Atlantic Coast management has only a 2% voting stake in the airline, management will need to convince 49% of outstanding shareholders to reject the deal.
CSFB, which upgraded Atlantic Coast to neutral, is among those who think the deal will happen. "While initially skeptical about the deal coming to pass, we have learned that
Atlantic Coast has extremely weak antitakeover defenses. When coupled with a disgruntled shareholder base that is very skeptical about management's plan to turn the regional carrier into a low-cost airline, those low barriers make the odds of Mesa's success quite high," said CSFB analyst Jim Higgins.
In Higgins' view, Atlantic Coast's defenses against a takeover are weak because shareholders vote on the entire board of directors each year and could replace them in one fell swoop -- also, Atlantic Coast shareholders can initiate an election of the board at any time, by acting through written consent.
But others -- notably UBS -- were not so certain that the deal will go through. According to UBS analyst Robert Ashcroft, investors should be selling Atlantic Coast shares into strength, while using weakness in Mesa shares as a buying opportunity. "While there will doubtlessly be deal gyrations (and after all, it's not too tough to raise the value of an all-stock deal), our initial view is that a merger is ultimately unlikely because Mesa will be unwilling to pay what ACAI's board has already assessed as the value of the independent discounter plan," wrote Ashcroft in an analyst note. "Either Atlantic Coast's board will capitulate (unlikely) or Mesa will have to go a very unfriendly route."
In a conference call, Mesa Chief Executive Jonathan Ornstein said he is prepared to go the unfriendly route if Atlantic Coast's board moves to block the deal, by offering the deal directly to Atlantic Coast shareholders. "We have looked at
Atlantic Coast's poison pill and feel confident that there are different strategies we can pursue that make sense," said Ornstein. "But there is the ability to act with written consent if the shareholders agree. That is one of the options we're looking at."
Ornstein didn't rule out the possibility of sweetening the deal, which values one Atlantic Coast share at 0.9 of a Mesa share, telling investors on the call that after the company does more in-depth due diligence on the merger, it will come up with a value that is mutually beneficial.
Some analysts favor Mesa's bid to go forward, saying the takeover would help both companies. "We are not convinced that Atlantic Coast's current plans to transform into a low-fare airline is going to be successful, given the cost structure of flying regional jet aircraft," said Susan Donofrio, Deutsche Bank analyst, in a note. "This alternative, therefore, is quite compelling to us."
Mesa Airlines should be able to continue to grow, expanding its fleet to 300 planes with the inclusion of Atlantic Coast's assets, without leveraging its debt-laden balance sheet. Mesa said the combined company's annual earnings would be up more than 25% than current levels, due to cost savings, expanded growth and efficiencies related to the merger. But the path to the merger could be bumpy. At the moment, Ornstein said Mesa Airlines' contact with Atlantic Coast has been limited to a single phone call announcing the deal. Now that it's Atlantic Coast's turn to respond, Ornstein expressed hope that the deal will proceed after talking to large shareholders of Atlantic Coast stock.
"We are anxiously awaiting their response, but we're not sure of what their timing is. I think we have to move quickly," said Ornstein. "In terms of us contacting their shareholders, we've been inundated with phone calls
by their largest shareholders. There is a reasonable chance of success right now, given the input of the largest shareholders."
Analysts say the deal will take months to close, depending on how hard Atlantic Coast fights it, and could result in Mesa's having to sweeten the bid. As of Friday's close, Mesa valued one Atlantic Coast share at $11.30.
"At a minimum, we construe Mesa's offer as an opening bid and would expect Atlantic Coast management to negotiate for a better price for its shareholders," said William Greene, analyst at Morgan Stanley. "That said, absent a competing bid, we would not expect the negotiated price to be much higher than $13 a share."
Both airlines posted gains Tuesday, reversing direction after Mesa's conference call with investors ended. Mesa was up 74 cents, or 6.4%, at $12.30 in afternoon trading, and Atlantic Coast was up 96 cents, or 8.7%, at $12.01. On Monday, in reaction to the deal, Mesa shares dropped 7.9%, while Atlantic Coast rose 23%.