Air Canada Contemplates a Counterbid From UAL, Lufthansa

And our columnist thinks it's a much better deal for Air Canada, UAL and Lufthansa shareholders than the Onex-AMR proposal.
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This morning,

UAL's

(UAL) - Get Report

United Airlines

unit and

Deutsche Lufthansa

disclosed their long-awaited counteroffer for

Air Canada

(ACNAF)

. United and Lufthansa, as founding members of the

Star Alliance

, said their agreement would let Air Canada fend off a bid from

Onex

and

AMR

(AMR)

.

The Onex-AMR proposal -- or hostile bid, depending upon your point of view -- would have Onex purchasing both Air Canada and

Canadian Airlines

and merging the two carriers.

TSC

readers

know that we have not been a proponent of this deal.

The new proposal would have Air Canada shareholders retain 100% ownership of the airline. UAL would invest C$440 million into Air Canada ($295 million in U.S. dollars), while Lufthansa would invest approximately C$290 million.

Yes, this deal is strictly for Air Canada. In a separate announcement, Air Canada said it would offer C$92 million for Canadian Airlines.

The nuts and bolts of the deal would have Lufthansa purchasing C$140 million in Air Canada convertible preferred shares. In addition, the German airline would assure C$150 million in Air Canada credit guarantees. UAL would purchase approximately C$92 million in Air Canada preferred shares and would also guarantee C$160 million in credit for Air Canada. This would give Lufthansa and United a 60/40 ownership of the joint bailout venture.

In addition, UAL would ante up C$190 million to buy three

Airbus A330

aircraft from Air Canada, then lease the planes back to Air Canada. The terms of the Star Alliance agreement, as well as other code-sharing agreements with Air Canada, also have been extended.

Finally,

CIBC Oppenheimer

also agreed to provide Air Canada with an additional C$200 million in financial assistance.

So, how will the deal work?

It's pretty simple. Air Canada will use the financial aid to buy back up to 35% of its stock, at C$12 per share. The rest of the deal is pretty straightforward.

In our estimation, this is a much better deal, both for shareholders of Air Canada and for shareholders of UAL and Lufthansa. Given the amount of money that Air Canada throws off to the Star Alliance, the amount of investment by both Lufthansa and UAL is minimal. Air Canada currently generates about C$700 million for its international partners, which shows that cash flow was the real issue in this situation. Forget the claims about forging the two airlines together and making a better airline for Canada.

This is the first time that the alliance system has come into play in terms of a proposed airline deal. In the end, it was pretty straightforward -- it was really nothing more than United's alliance vs. American's alliance.

United was not about to let Air Canada become a member of the

Oneworld Alliance

, which is what would happen under the Onex-AMR deal. And the real reason that AMR is involved with the Onex deal at all is to guarantee that whatever airline was left standing in Canada was at least a member of the American-led Oneworld Alliance.

Stay tuned for round three. And oh yes, we expect we'll hear a great deal of wailing and such before then.

Delta, Continental Report Earnings as Expected; Delta Knots Up Comair

Monday saw four airlines report earnings, and overall, we have to say that results from both

Continental

(CAL) - Get Report

and

Delta Air Lines

(DAL) - Get Report

were about as we had expected, while results for

Midwest Express

(MEH)

were a little better than we had expected. We're still digesting results from

Mesaba

(MAIR)

. More on that later.

Of course, of more note than earnings yesterday was Delta Air Lines' announcement that it would acquire the balance of

Delta Connection

carrier

Comair

(COMR)

. Delta owned approximately 22% of the airline and will pay $1.8 billion for the remaining 78%, at a price of $23.50 a share.

Not a surprising move, for several reasons. After its last conference call, it was obvious that Delta was on a mission to clean up its balance sheet and stockpile cash. The airline has since sold off its position in

Singapore Airlines

and

Swissair

, and has a considerable amount of cash available through the future exercise of

priceline.com

(PCLN)

warrants. But, more importantly, we knew that the airline was looking at Comair and

Atlantic Coast

(ACAI)

as possible acquisition targets. When the airline announced the 10-year code-sharing agreement with Atlantic Coast in September, that more or less told us that Atlantic Coast was off the radar screen and Comair was probably

numero uno

.

We like this deal. Scuttlebutt from the usual analyst sources yesterday was that the airline paid too much. We disagree. There was also some question as to whether it was a good deal to spend that much cash. The deal will give Delta double-digit returns, cash on cash. We have no problem with this.

But the intangible benefits of the deal are great. First, Delta will keep the existing management team at Comair. There is none better in the regional airline industry. Delta seems to be aware of this, as the company has indicated that Comair Chairman David Siebenburgen will head a new company that will manage the regional jet strategy and allocation for both

Atlantic Southeast Airlines

(which Delta acquired earlier this year) and Comair. Great move. Siebenburgen is the grandaddy of the regional jet concept.

Delta CFO Ed West also said in the airline's conference call yesterday that the benefits of the Atlantic Southeast acquisition, in terms of providing Delta with increased aircraft and route flexibility, as well as other positive revenue synergies that were not expected, have far exceeded the airline's original expectations.

And remember, Atlantic Southeast was a managerial nightmare for Delta. Comair is just the opposite.

We think this acquisition also will ease the adversarial situation between the pilots at Delta Air Lines and Comair. We're not saying that all will be wonderful, serene and heavenly, but we think, especially given the benefits that the Atlantic Southeast deal has already brought to the mainline company, that this arrangement will be far easier to navigate than the previous situation.

Remember that Delta and Comair were facing negotiations on three fronts: the pilot contract at Delta, the pilot contract at Comair and the 10-year code-sharing agreement between Comair and Delta that expired this month.

This deal does away with the code-sharing issue, and we really do believe, makes the hot issue of the regional jet a bit less of a lightning rod for the pilot negotiations at both airlines.

Holly Hegeman, based in Barrington, R.I., pilots the Wing Tips column for TheStreet.com. At time of publication, Hegeman held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. You can usually find Hegeman, publisher of PlaneBusiness Banter, buzzing around her airline industry Web site at

www.planebusiness.com. While she cannot provide investment advice or recommendations, she welcomes your feedback at

hhegeman@planebusiness.com.