Southwest Airlines takes aim at Frontier; Exelon CEO still looking for merger targets

By Stephanie N. Rotondo

Portland, Ore., July 31 - Southwest Airlines Co.'s announcement Friday that it is making a play for bankrupt Frontier Airlines Holdings Inc. was lauded by some as a good move for the airline.

In an interview with Prospect News, one analyst said that Frontier would "bring a lot to the party" for Southwest, including a gain in market share in Denver. Also, it would continue Southwest's efforts to further grow its business with an attractive company.

Meanwhile, Exelon Corp.'s chief executive officer made some comments regarding merger-and-acquisition activity that seemed to be in contrast with what he said just a week earlier.

In a news report released Friday, the top executive said that he is still considering potential acquisitions. But after the company lost its bid for NRG Energy Inc., he had stated that the company was looking to focus internally.

The stock markets gyrated throughout the session on a smaller-than-expected dip in gross domestic product. The Dow Jones Industrial Average ended 17.15 points, or 0.19%, higher at 9,171.61. The Standard & Poor's 500 index was also better, gaining 0.73 points, or 0.07%, to 987.48. The Nasdaq Composite, however, fell 5.80 points, or 0.29%, to 1,978.50.

Southwest pursues Frontier

Southwest Airlines is taking a stab at increasing its market share by submitting a bid for bankrupt regional carrier Frontier Airlines.

Southwest, a Dallas-based carrier, submitted a bid on Thursday valued at $113.6 million - which is more than the current bid from Republic Airways Holdings Inc. of $108.75 million.

"We are excited about the opportunity to submit a bid," Gary Kelly, Southwest's chairman, president and CEO, said in a press release. "We see a strong fit between our company cultures, a mutual commitment to high quality customer service, and similar entrepreneurial roots."

Frontier, which is based in Denver, filed for bankruptcy in April 2008. Republic submitted its bid for the company on June 22. Under the terms of the agreement, however, Frontier has until early August to seek other bidders.

If Southwest were to be successful in its bid, it would receive in return a large portion of market share in Denver.

"The company has a position in Denver that is not dominant at all," said Helane R. Becker, an analyst with Oppenheimer & Co. By purchasing Frontier, it would allow Southwest to compete with Denver's biggest carrier, United Air Lines Inc.

"Frontier has some pretty good assets that would complement Southwest," Becker continued. For example, Frontier has a route running to Washington National Airport, which Southwest currently does not offer.

"There's a lot that Frontier brings to the party," she said.

In addition, Southwest would give Frontier a stronger balance sheet once it emerges from Chapter 11 protections.

"This deal gets back to growth mode," Becker explained. Southwest has always tried to grow its business, whether organically or otherwise, she said. In recent times, the economy has nearly prohibited the company from doing such things. Therefore, Frontier is likely an attractive acquisition target.

But there are still many obstacles that might emerge, on top of having to go through the auction process through the bankruptcy court.

"Could other bidders emerge? Yes," Becker said. But of any potential bidders, United Air Lines "might be tough to get through antitrust," given its large market presence in Denver.

Southwest's stock gained 12 cents, or 1.55%, to $7.85. Frontier's stock increased by 7.2 cents, or 62.61%, to 18.7 cents.

Exelon CEO on the hunt

Despite a three-time losing streak, Exelon CEO John Rowe is reportedly still looking for potential acquisitions.

In a Chicago Tribune report, Rowe would not rule out another buyout attempt.

"My own investors want me to say on a Bible that I won't look for a while," Rowe said in the article. But, "we'll keep looking for something we can do. The industry needs consolidation."

However, that statement seems to be in direct contrast with what Rowe said in a July 21 press release announcing that the company had terminated its offer for NRG Energy.

"Now we can redouble our focus on Exelon's stand-alone growth opportunities," Rowe stated. "We have the nation's largest low-carbon nuclear fleet, and our plan to expand our nuclear output through uprates provides even greater upside from carbon legislation. We believe our long-term growth proposition remains the best in the industry."

In an earnings conference call later that week, Rowe again stated that investing internally was the way to go.

"We believe investing in our own assets and operations is the best way to spend our money," he said.

Given the opposing comments, it seems unclear what Rowe's next move will be.

"Within the independent power producer space, there is no other company that makes sense for them," said Brandon Blossman, an analyst at Tudor, Pickering & Holt. Blossman covers that sector, though not Exelon specifically.

"It wasn't a coincidence that they picked NRG," Blossman added, noting that a combination with other companies, such as Calpine Corp. and the like, was not really an option.

Blossman did concede that Rowe is likely looking at integrated power targets.

"It kind of fits with his comments," Blossman said. "There's nothing on the table, but wouldn't it be nice if there was?"

Still, Blossman speculates that putting the focus internally is probably a good move for the company and shareholders alike.

"It's not a bad business," he said. "It probably would pay some dividends to focus internally."

Exelon's equity fell 95 cents, or 1.83%, to $50.86. The utility services holding company is based in Chicago.

Mentioned in this article:

Exelon Corp. NYSE: EXC

Frontier Airlines Holdings Inc. Pink Sheets: FRNTQ

Southwest Airlines Co. NYSE: LUV

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