War Heats Up Between Mesa, Atlantic Coast - TheStreet

War Heats Up Between Mesa, Atlantic Coast

Atlantic Coast files a court complaint in a bid to ward off Mesa's hostile takeover offer.
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The war of words surrounding

Mesa Airlines'

(MESA) - Get Report

unsolicited takeover bid for

Atlantic Coast Airlines

(ACA) - Get Report

got a little uglier on Tuesday.

In a complaint filed with the U.S. District Court for the District of Columbia, ACA alleged that Mesa and

UAL

(UAL) - Get Report

unit United are working together to try to replace ACA's board of directors. ACA also said that Mesa executives have engaged in questionable stock trades, have conflicts of interest at the board level and haven't been upfront with investors in explaining why they want to take over ACA.

"United is a participant in Mesa's consent solicitation and proposed transaction. ACA alleges that Mesa's proposed plan to acquire all of the outstanding shares of ACA's common stock is nothing more than an attempt by Mesa and its undisclosed backer, United, to prevent ACA from establishing an economically viable, low-fare, low-cost airline," said ACA, in a statement.

ACA's complaint went on to allege that, in addition to eliminating the potential for low-cost competition at Washington's Dulles Airport, where both United and Mesa would be operating, the merger would remove a key stumbling block that would allow United to emerge from bankruptcy. On July 28, ACA announced plans to reinvent itself as a low-cost carrier, unwilling to negotiate lower rates regarding its long-term contract to fly for United if and when United emerges from Chapter 11 protection.

While United said that it hoped to sign a deal "as soon as possible" to have Mesa fly from Dulles as a United Express partner, the carrier denied any role in Mesa's takeover bid. In a press release, United said, "It is absolutely untrue that we have had any involvement in Mesa's offer."

A Mesa spokesperson also downplayed the ACA complaint, calling it "completely expected" and dubbing it "an attempt to keep ATA shareholders from choosing the future direction of the company."

Collusion or Exaggeration?

In its complaint, ACA cites a Mesa conference call on Oct. 7 as proof that Mesa Chief Executive Jon Ornstein made contact with United executives before making the unsolicited bid for ACA. In the call, Ornstein mentioned that he had talked with United about Mesa's negotiations with ACA. Also, ACA said that Mesa has not been clear about the real reason it wants to take over ACA. According to ACA, the reason for the takeover is so that Mesa can shore up its balance sheet and eliminate a competitor for United, which Mesa relies on for a sizeable chunk of revenue.

"Mesa is having problems financing additional aircraft purchases, a cornerstone of its growth plans ... ACA believes that Mesa is seeking control of ACA so that Mesa can gain the use of ACA's cash on hand, which is expected to reach over $200 million by year end," said ACA. "Mesa's desire to acquire ACA so it can use the company's cash to resolve Mesa's own financial difficulties is material information that should have been disclosed to stockholders and the market."

While Ornstein wasn't explicit about the changes to the balance sheet as a result of the merger and hasn't directly addressed ACA's cash position, the CEO has been very public with his opinion that Mesa's biggest weakness is its ability to finance planes, reiterating this view in a conference call discussing the merger on Oct. 7. (He also

mentioned this issue in an interview with

TheStreet.com

on Aug. 9.)

"The combination is well capitalized for future growth. As you know, right now, one of Mesa's biggest challenges and something we have been very frank about has been our ability to finance new aircraft," said Ornstein, on the Oct. 7 conference call. "Combining with Atlantic Coast, we feel very comfortable going forward that all of the aircraft that we currently have on order and those that we're contemplating ordering will become financeable."

Furthermore, ACA said that Mesa executives, including Ornstein, began selling their shares in September, before the announcement of the takeover attempt. According to

SEC

filings, a number of Mesa executives and directors sold shares between Sept. 8 and Sept. 24, with Ornstein selling more than $2 million in stock, or 175,000 shares, over that span.

"These sales of Mesa's shares by Mesa's directors just prior to the announcement of Mesa's proposed transaction involving ACA are in contrast to their ebullient view of Mesa's future," said ACA, in its complaint.

However, Ornstein, who held 110,000 Mesa shares as of Sept. 24, has a history of being active in the shares. From Feb. 20 to March 10 of this year, when shares were around $3, Ornstein bought 51,000 shares of the company. With Mesa shares having more than quadrupled in the six months from the time Ornstein bought shares to the time he began selling in September, the stock trades may have been profit-taking.

Not-So-Independent Board

Lastly, ACA maintains that the board of directors Mesa wants to install lacks independence and engages in self-dealings that would impair its fiduciary responsibility to ACA shareholders. And while Mesa has moved to make its board more independent, questions still remain.

According to a story in the Oct. 13 edition of the

Washington Post

, Ornstein and board members George Murnane and James Swigart are involved in partnerships that do business with and profit from Mesa. The story said other directors, notably Herbert Denton (a Mesa board member and owner of investment bank Providence Capital) and Joseph Manson (a Mesa board member and law partner at Piper Rudnick) have also profited from their closeness to the company.

In reaction to the allegations that his board was less than independent, Ornstein vowed to make changes and on Monday announced that Murnane would be removed from the board and replaced by Robert Beleson, former chief marketing officer of Avolar, a division of United. But Swigart, Denton and Manson remain board members.

"Seven of Mesa's nine directors have had, and upon information and belief, continue to have, outside business relationships with Mesa, including highly lucrative consulting contracts, which compromise their independence and taint their judgment," said ACA in its complaint.

On Tuesday, investors boosted shares of both companies. Mesa was up 40 cents, or 3.9%, at $10.80 in afternoon trading, while ACA was up 30 cents, or 2.8%, at $11.05.