The Deal: Judge Grounds AMR Confirmation Bid

NEW YORK ( The Deal) -- AMR Corp. ( AAMRQ) has been forced back to the hangar following an antitrust lawsuit from the Department of Justice, which challenged a planned $11 billion merger with US Airways Group ( LCC).

Following a confirmation hearing on Thursday, Aug. 15, Judge Sean H. Lane of the U.S. Bankruptcy Court for the Southern District of New York in Manhattan gave parties in the case until Aug. 23 to file briefs either supporting or opposing confirmation and set a new confirmation hearing for Aug. 29.

Lane told the courtroom he had to "strongly consider" canceling the Thursday hearing, as all parties had just two days to respond to the DOJ's suit, but he decided that "might have created unhelpful confusion and uncertainty."

The DOJ was joined in its action Tuesday by attorneys general from six states and the District of Columbia. The government plaintiffs asserted the merger, which would form the world's largest airline, would substantially lessen competition for commercial air travel in local markets throughout the U.S. and result in passengers paying higher airfares and fees for ancillary services and receiving less service overall.

The DOJ said AMR's American Airlines and US Airways compete directly on more than 1,000 routes where one or both offer connecting service, representing tens of billions of dollars in annual revenue. They engage in head-to-head competition with nonstop service on routes worth about $2 billion in annual routewide revenue.

John Butler Jr. of Skadden, Arps, Slate, Meagher & Flom, counsel to AMR's official committee of unsecured creditors, and debtor counsel Stephen Karotkin of Weil, Gotshal & Manges said in court they had anticipated a lawsuit while forming the plan, but they requested Lane confirm the plan anyway, asserting it was best to submit the result of months of negotiations to the DOJ even if the agency later rejected it. Karotkin said the parties supporting the plan believe the merger is the best outcome for all creditors and that Lane can confirm it now even though he does not have the power to consummate it.

Butler said the committee is "unhappy" with the DOJ's objection to the merger but not surprised.

"Did we plan for this eventuality? I thought we did, and I think we did," he told the court.

Butler pointed to the latest version of the plan, filed Wednesday with nonmaterial amendments, asserting that although the merger agreement has an Oct. 14 deadline for closing the deal, the term could be extended through Dec. 13. (The attorney did not address what would happen beyond then.)

"The plan was supported by a number in my career that frankly I have not seen," Butler said, noting that more than 99% of AMR shareholders had voted to approve the plan. At least 88% of the creditors in each class to vote on the plan also approved it, with the accepting creditors hold at least 97% of the claims in each creditor class.

Karotkin said the suit "should be no surprise to anybody," but he believes the plan should be confirmed.

"I don't think there is any difficulty, even sitting here today, in saying that this plan is feasible," he said.

Lane, meanwhile, on Thursday also postponed a ruling on U.S. Trustee Tracy Hope Davis' objection to the plan. Davis has faulted a $19.88 million severance payment for CEO Tom Horton, which AMR seeks to allow as an administrative claim, as well as certain expenses for key creditors.

"All the hard work Mr. Horton did was his job, as the CEO of an international airline now in bankruptcy," said Susan Golden, counsel to Davis. "If he didn't do his best to work hard and maximize the value of this estate, it would have been a breach of duty."

Golden argued the payment is impermissible, as there is no actual severance from AMR. Horton would serve as chairman of the board of directors for the merged company and would not be paid until the plan had been consummated and the merger completed. Golden said a plan should not include a provision for what a board member would be paid in a company outside of bankruptcy and that the reorganized company can determine that when it exits.

Karotkin, in a counterargument, said Horton has a "critical role going forward" and is "directly involved in the transition process."

Under AMR's reorganization plan, first filed April 15, secured creditors would be paid in full in cash, with the sale proceeds of their collateral or with the return of the collateral securing their claims. Secured claims include $6.78 billion in secured aircraft claims and $3.47 billion in other secured claims.

Priority claims ($356.7 million) and administrative claims ($290.4 million) would be paid in full on the effective date. Priority tax claims would be paid in full within five years.

Unsecured creditors would receive a pro rata share of new mandatorily convertible preferred stock. AMR owes an estimated $967.13 million in unsecured claims and $700,000 in other general unsecured claims, unit American Airlines Inc. owes $1.97 billion, and unit AMR Eagle Holding Corp. has $20.2 million in unsecured claims.

Convenience claims against AMR Eagle ($2.5 million) and American Airlines ($7.5 million) would be paid in full.

US Airways shareholders would get one share of common stock at 1 cent per share for each of their shares, for a total of 28% of the diluted equity interests in the new company.

The remaining 72% would be distributable to unsecured creditors, labor unions, certain employees and holders of AMR equity interests. The U.S. Airline Pilots Association would get 13.5% of new common stock, the Transport Workers Union of America AFL-CIO 4.8% and the Association of Flight Attendants 3%. The unions are owed $1.72 billion.

All of the unions have issued statements critical of the Department of Justice and supporting the merger.

The plan would be funded with $3.25 billion in exit financing that would be secured by slots, gates and route authorities that are used to operate nonstop scheduled air carrier services between the U.S. and South America, Mexico and Central America. AMR on May 31 filed the financing motions under seal.

Lane on May 9 authorized AMR to obtain a $2.25 billion exit term loan and a $1 billion exit revolver. The term loan will be available to AMR during its bankruptcy but will convert to an exit facility on the debtor's emergence from Chapter 11. The revolver will only be available on the airline's bankruptcy exit.

Lane approved the disclosure statement for the plan on June 4.

AMR was the only major U.S. airline that had not sought Chapter 11 protection until Nov. 29, 2011, when it filed its petition. AMR blamed its bankruptcy on weak financial performance since 2009, which has left the Fort Worth company behind its major rivals, many of which restructured and emerged from bankruptcy before 2009.

AMR was hurt further by an uncertain economic outlook, volatile fuel prices, an uncompetitive cost structure and a diminishing financial condition, which had been the subject of industry analyst reports and the cause of speculation about a possible bankruptcy filing.

Thomas A. Roberts, Glenn D. West and Alfredo Pérez of Weil Gotshal are also debtor counsel.

Jones Day's Joe Sims and J. Bruce McDonald; Paul Hastings' M.J. Moltenbrey; Debevoise & Plimpton; and K&L Gates are AMR's legal advisers. Rothschild's Christopher Lawrence, Homer Parkhill, Yusik Choi and Matt Chou are its financial advisers.

Sims is representing AMR in the DOJ lawsuit.

A Barclays team including Josh Connor, Ben Metzger, Kristin Healy and Larry Hamdan joined with Jim Millstein of Millstein & Co. to serve as financial advisers to US Airways, with Peter F. Kerman of Latham & Watkins; O'Melveny & Myers; Cadwalader, Wickersham & Taft; and Dechert's Paul T. Denis, Gorav Jindal and Rani Habash providing legal counsel.

O'Melveny litigator Richard Parker, a former director of the competition bureau at the Federal Trade Commission, is representing the airline in the DOJ lawsuit, along with Dechert partner Paul Denis.

A Skadden Arps team led by John and Jay Goffman working with Togut, Segal & Segal are counsel to the creditors' committee. Moelis & Co.'s William Derrough, Gregg Polle and Zul Jamal along with Mesirow Financial are financial advisers to the committee.

Gerard Uzzi and Tom Janson of Milbank, Tweed, Hadley & McCloy and Eric Siegert of Houlihan Lokey represent an ad hoc committee of AMR creditors that signed a plan support agreement.

Seabury Group and Amy Caton of Kramer Levin Naftalis & Frankel represent Bank of New York Mellon and Law Debenture Trust Co. of New York as indenture trustees in connection with the merger negotiations.

Written by Pat Holohan.

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