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TPG trumps AirTran’s offer for US airline

US regional airline Midwest has turned down discount airline AirTran’s buyout offer in favour of a higher, $400m bid by TPG Capital and Northwest Airlines. A formal agreement is expected in days.

TPG Capital is on schedule to acquire Milwaukee, Wisconsin-based Midwest Air Group in an all-cash deal worth approximately $400 million (€294 million). The US regional airline has said it will “pursue” the offer, and expects to ink an agreement by Wednesday, pending a final valuation.

TPG offered $16 per share in cash for the company, a 12.5 percent premium to Midwest’s closing share price on Friday. Midwest had earlier received an offer from discount US airline AirTran Holdings for $15.75 per share in cash and stock, but its board of directors decided that TPG’s offer “presented greater value and certainty for Midwest shareholders”, according to a statement.

The proposed transaction will be made through TPG Partners V, a $15.3 billion fund, and one or more partners including passive investor Northwest Airlines. Midwest and Northwest have a co-chair agreement that allows passengers to fly on both airlines in the course of a single trip. The partnership is worth “millions of dollars” in additional revenue for Midwest, said company spokesperson Carol Skornicka.

AirTran had been trying to acquire Midwest for over two years, during which time the hostile takeover target set up a website, www.savethecookie.com, on which anyone could sign a petition expressing opposition to the deal. The name of the site is a reference to the homemade cookies Midwest serves during its flights.

Skornicka said Midwest had been unable to reach agreement with AirTran on a number of key issues, particularly employee benefits. AirTran “refused to treat our employees the way we thought they should be treated”, Skornicka said. She said under AirTran’s proposal, Midwest employees would have lost all of their accumulated years of service credit for pension plans and travel benefits.

She also said that the stock portion of AirTran’s offer was undesireable, because the fluctuations in Midwest’s stock price meant that the terms of the deal could change adversely.

AirTran said in a statement it had allowed its tender offer to expire, and that it believed Midwest had made a poor decision in giving preference to TPG.

“The Midwest board has chosen to ignore the overwhelming majority of shareholders’ wishes to merge with AirTran, a partner with whom Midwest could have grown and become a national carrier, including our commitment to provide employment protection and more jobs for its employees and more choices for its customers,” AirTran chairman and chief executive Joe Leonard said in a statement. “Instead, the Midwest board has chosen a path that will benefit current senior management by selling out to a private equity firm and a so-called ’passive’ investor whose involvement will surely raise antitrust concerns, casting doubt for shareholders on whether a transaction can, in fact, close.”

TPG has invested in several other airlines, including Continental Airlines, America West Airlines, and Ryanair. TPG generated an IRR of 79 percent on its investment in Continental, which it bought with Air Canada in 1993 after Continental had gone through two bankruptcies.

This year, the firm has been involved with several high profile auctions for airlines. TPG dropped out of bidding for Italian airline Alitalia in May, citing the Italian government’s requirements for the sale process. As part of a consortium led by Macquarie, TPG also abandoned its pursuit of Australian airline Qantas after the airline rejected its11.1 billion ($9.2 billion, €6.8 billion) in May.

The firm is currently formalising a €3.4 billion bid for Spanish airline Iberia, after gaining access to the airline’s books in mid-July.