American Airlines, US Airways boards unanimously approve merger

By Caroline Salls

Pittsburgh, Feb. 14 - The boards of directors of American Airlines, Inc. parent AMR Corp. and US Airways Group, Inc. have unanimously approved a definitive merger agreement under which the companies will combine to create a global carrier with an implied combined equity value of roughly $11 billion, according to an American Airlines news release.

The combined value is based on the price of US Airways stock as of Feb. 13.

Operating under the American Airlines name, the company said the combined airline will have a robust global network and a strong financial foundation.

The company said customers will have access to more choices and increased service across the combined company's larger worldwide network and through an enhanced oneworld Alliance, of which American Airlines is a founding member.

With firm orders for more than 600 new mainline aircraft, the combined airline will have one of the most modern and efficient fleets in the industry and a solid foundation for continued investment in technology, products and services, the release said.

Equity distribution

Under the merger agreement, US Airways stockholders will receive one share of common stock of the combined airline for each share of US Airways common stock then held. The total number of shares of the combined airline issuable to holders of US Airways equity instruments will represent 28% of the diluted equity of the combined airline.

American said the remaining 72% diluted equity ownership of the combined airline will be issuable to stakeholders of AMR and its debtor subsidiaries that filed for Chapter 11 bankruptcy, American's labor unions and current AMR employees.

Plan support

The merger will be completed under a Chapter 11 plan of reorganization.

In connection with the merger agreement, AMR has entered into a plan support agreement with unsecured creditors holding $1.2 billion of pre-bankruptcy claims against the debtors.

In addition to supporting a plan that incorporates the merger, the support agreement includes a settlement of intercreditor and intercompany claims issues.

Under the proposed plan, holders of existing AMR equity interests will receive an initial distribution of 3.5% of the common stock of the combined airline, with the potential to receive additional shares if the value of common stock received by holders of unsecured claims would satisfy their claims in full.

Holders of pre-bankruptcy unsecured claims to which both AMR and American Airlines are obligors will receive shares of mandatorily convertible preferred stock equal to the full amount of their claims. These shares will convert into common stock of the combined airline at 30-day intervals during the 120-day period following the plan effective date.

Holders of unsecured claims that are not guaranteed will receive a combination of shares of the same class of mandatorily convertible preferred stock as the "double dip" creditors and shares of common stock of the combined airline.

Also, American Airlines' labor unions and other employees will receive a total of 23.6% of the common stock of the combined airline ultimately distributed to holders of unsecured claims.

Corporate governance

American Airlines president and chief executive officer Thomas Horton will act as chairman of the combined airline's board of directors through its first annual meeting of shareholders and will also act as the combined airline's representative to the oneworld Alliance and the International Air Transport Association.

Meanwhile, US Airways chairman and CEO Doug Parker will serve as CEO and a member of the board of directors. He will assume the additional position of chairman of the board following the conclusion of Horton's service.

American said the board will initially be made up of 12 members, comprised of three American Airlines representatives, including Horton, four US Airways representatives, including Parker, and five AMR creditor representatives.

Service implications

American said the combined airline is expected to maintain all hubs currently served by American Airlines and US Airways. Both airlines expect that the regional carriers they own, including AMR's American Eagle and US Airways' Piedmont and PSA, will continue to operate as distinct entities.

The company will be based in Dallas-Fort Worth and will maintain a significant corporate and operational presence in Phoenix.

American said the combined airline is expected to provide the most service across the East Coast and central regions of the United States, expand its presence and further strengthen its western U.S. network, bolster American's position in Latin America and the Caribbean, enhance connectivity within the oneworld Alliance, including joint businesses with British Airways and Iberia across the Atlantic and with Japan Airlines and Qantas across the Pacific, serve 21 destinations in Europe and the Middle East and expand service from its hubs to offer increased service to existing markets and service to new cities.

In addition, American Airlines' said its landmark agreements with Airbus and Boeing, designed to transform the American Airlines fleet over the next four years, will solidify the combined airline's fleet plan into the next decade.

Combination upside

"The combination of American and US Airways brings together two highly complementary networks with access to the best destinations around the globe and gives us a strong platform to provide our customers the most connected, comfortable travel experience available," Horton said in the release.

"The operational and financial strength of the combined airline is expected to enable continued investment in new products and technologies and will create exciting new opportunities for our people, even as we deliver strong cash flow and sustainable profitability."

Parker said in the release, "The combined airline will have the scale, breadth and capabilities to compete more effectively and profitably in the global marketplace.

"This merger will create a stronger company, with the path to improved compensation and benefits and greater long-term opportunities for all our employees."

Stakeholder benefits

American Airlines said its stakeholders and US Airways' shareholders are expected to benefit from the significant upside potential of the new combined airline, which is expected to have about $40 billion in revenues based on the combination of each company's projected 2013 performance.

The combination is expected to deliver enhanced value to American Airlines stakeholders and is projected to be significantly accretive to EPS for US Airways shareholders in 2014.

Specifically, American said the transaction is expected to generate more than $1 billion of annual net synergies in 2015, including $900 million in network revenue synergies, resulting predominantly from increased passenger traffic, taking advantage of the combined carrier's improved schedule and connectivity, an improved mix of high-yield business and the redeployment of the combined fleet to better match capacity to customer demand. The companies expect $1.2 billion of one-time transition costs for the merger, spread over the next three years.

The combination is expected to be completed in the third quarter of 2013. During the period between the signing and closing of the transaction, a transition planning team comprised of leaders from both companies will develop an integration plan.

Tax benefit plan

In conjunction with the execution of the merger agreement, US Airways' board has adopted a tax benefit preservation plan designed to help preserve the value of net operating losses and other deferred tax benefits resulting from the merger with AMR.

The tax benefit preservation plan, which will remain in place no longer than the closing of the merger, is designed to reduce the likelihood that changes in the US Airways investor base would limit the future use of the tax benefits by US Airways or the combined enterprise.

As part of the plan, the US Airways board has declared a dividend of one common stock purchase right for each outstanding share of US Airways common stock.

The rights will be exercisable if a person or group acquires beneficial ownership of 4.9% or more of US Airways' outstanding common stock and if a person or group that already beneficially owns 4.9% or more of the common stock of US Airways acquires additional shares other than as a result of a dividend or a stock split.

If the rights become exercisable, all holders, other than the person or group triggering the rights, will be entitled to purchase US Airways common stock at a 50% discount. Rights held by the person or group triggering the rights will become void and will not be exercisable.

Additionally, the certificate of incorporation of the combined company will contain limitations on specified acquisitions and sales of shares effective upon closing of the merger.

US Airways is an airline operator based in Tempe, Ariz.

AMR Corp., the Fort Worth, Texas-based parent of American Airlines, filed for bankruptcy on Nov. 29, 2011 in the U.S. Bankruptcy Court for the Southern District of New York. Its Chapter 11 case number is 11-15463.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.