Tuesday, April 30, 2013

Filing lays out long road to the American Airlines-US Airways merger

For those historians amongst us, American Airlines had laid out the long road from idea to merger navigated by American and its persistent suitor US Airways.

According to an S-4 registration document filed Monday, the first stop was an April 14, 2011, meeting of the US Airways Group board in which airline executives outlined the potential of a US Airways-American merger.

The S-4 says Tom Horton, the American’s president, approached US Airways chairman and CEO Doug Parker at an industry event Sept. 7, 2011. “Mr. Horton explained that AMR had recently completed the then-largest ever order of new aircraft and that upon entering into new labor agreements AMR might soon be positioned to engage in discussions about strategic alternatives, including a combination with US Airways Group.”

In return, “Mr. Parker agreed that a combination of the two airlines could be beneficial to both parties, and that the two should speak again after AMR had secured new labor agreements.”
AMR chairman and CEO Gerard J. Arpey called Parker in October 2011 and said “he was aware of the earlier discussion between Mr. Horton and Mr. Parker. Mr. Arpey said that once AMR had achieved new labor contracts, he would be open to discussing potential strategic transactions.”
In the same call, Arpey “encouraged Mr. Parker to consider the possibility of US Airways departing the Star Alliance and becoming a member of the Oneworld alliance as an initial step, but one that might result in a larger transaction sometime in the future.”

Of course, American and parent AMR filed for bankruptcy on Nov. 29, 2011. For about the next five or six months, we had Parker pursuing AMR/American and Horton trying to fend him off with protests that merger discussions should wait after AMR/AA emerged from bankruptcy proceedings as a reorganized, stronger company.

After that, American and the unsecured creditors committee entertained the idea as American was also developing its plan to emerge as a stand-alone carrier. We had the signing of the non-disclosure agreements, followed by a long period of negotiating.

Keep reading for a long account of the pursuit, wooing and marriage.

Horton, who took over as chairman and president of AMR and American on the evening of Nov. 28, 2011, called Parker and other airline CEOs the next day to advise them of the bankruptcy filing.
On Dec. 21, 2011, “Mr. Parker called Mr. Horton and asked if he and members of his management team could meet with Mr. Horton to discuss a potential combination,” the document said.
“Mr. Horton said to Mr. Parker that while he believed a combination could be beneficial to both companies and that he was always willing to talk, AMR and its board of directors were completely focused on completing the company’s restructuring.”

In January, US Airways hired legal and financial advisors to look at an AMR merger, a fact that Parker disclosed to Horton in a phone call. US Airways representatives began talking to the unsecured creditors committee, which had to be on board if there were to be a merger.
On April 20, 2012,

Parker and American’s three labor unions made public their secret talks to negotiate collective labor agreements that would go into effect if US Airways and American merged. Parker contacted Horton to tell him of the deals, and to present a merger proposal that would have US Airways shareholders holding 50.1 percent of the stock in the combined companies.

Horton repeated to Parker that his company’s focus was on the bankruptcy case, but he informed the AMR board that day of US Airways’ proposal.

With pressure mounting on AMR, the company and UCC on May 1 agreed to a process to consider strategic alternatives and compare them to the stand-alone plan that AMR was pursuing. But the AMR board concluded in meetings May 15 and 16 that US Airways’ April 20 proposal was too low.
“Accordingly, AMR’s board determined that the April 20 Indication of Interest did not merit further discussion,” the document said. “However, Mr. Horton explained that at a significantly different equity split a combination with US Airways Group could be attractive to AMR and its stakeholders.”
On July 10, “AMR announced that, in cooperation with the UCC, it would begin a review of strategic alternatives, including a potential merger.”

On July 17, Horton met with Parker and said the company was preparing to look at potential mergers and would soon propose some non-disclosure agreements.

AMR and its advisors in July and August “approached several other airlines to gauge their interest in a strategic combination,” the document stated.

“AMR also had discussions with potential financial investors with experience in the airline industry to gauge their interest in financially supporting an independent plan of emergence or other investment. AMR’s board was periodically apprised of the status of these potential alternatives,” it said.

On Aug. 30, 2012, American and US Airways announced publicly that they were signing non-disclosure agreements to discuss a potential merger. From there, it became a matter of negotiations.
On Oct. 22, AMR sent US Airways the form of a possible merger. On Nov. 1, the US Airways board replied with its own offer, known as the “November proposal.”

■ US Airways shareholders would get 30 percent of the combined company, with the rest going to AMR stakeholders.
■ The headquarters would be in Fort Worth.
■ The merged carrier would be branded American Airlines.
■ Parker would be chairman and CEO.
■The new company’s board would have 11 members, five picked by US Airways.
Parker gave Horton the November proposal on Nov. 2, and the AMR board reviewed it the same day. Although the proposal was found wanting, “at Mr. Horton’s urging, the AMR board decided it was prudent to continue pursuing a potential transaction with US Airways Group, but to set aside any discussions about management or board composition until other aspects of a transaction were resolved.”

The AMR board on Nov. 10 endorsed the idea of a merger, upon Horton’s endorsement.
“However, the board instructed Mr. Horton to inform Mr. Parker that uncertainty surrounding the combined company’s labor costs rendered it difficult to determine the right Equity Split, which AMR’s board believed needed to be in excess of 80%, and that these matters had to be addressed if discussions were to continue.”

On Nov. 14, “Mr. Horton called Mr. Parker to indicate that the AMR board had expressed its general support for the transaction. He explained, however, that AMR’s share of the Equity Split likely needed to be above 80%, and that the uncertainty surrounding the combined company’s labor costs needed to be mitigated.”

The next day, the US Airways board balked at AMR’s position that its stakeholders needed more than 80 percent of the merged company. The US Airways board said it didn’t support extending the non-disclosure agreements to take them beyond their scheduled Nov. 30 expiration.

“In addition, the board instructed management to inform AMR’s advisers that if the AMR board’s view of an appropriate Equity Split was as communicated by Mr. Horton, then it was not productive to continue discussions,” the document said.

After a series of discussions between AMR, the UCC and US Airways, Horton called Parker on Nov. 25 “and suggested that further discussions between the companies’ advisers regarding the proposed Equity Split should be deferred,” the document said.

“Mr. Horton further advised that that while he believed there was likely a solution somewhere between the two parties’ respective positions on the Equity Split, it was not possible for AMR to reach a final conclusion on the Equity Split without first mitigating the potential labor costs and risks attendant to a potential merger,” it said.

“Mr. Parker agreed that the two parties should address the labor issues and make progress on negotiating the merger agreement prior to revisiting the Equity Split.”

At an AMR board meeting on Nov. 27, the airline’s advisors said that AMR shareholders might actually get something after all, that their stock wouldn’t be entirely worthless.

Parker persuaded the US Airways board on Nov. 28 to keep talking and extend the non-disclosure agreement past its Nov. 30 expiration. The next day, the two airlines signed the extension.
In December, the unions and management worked out the transition deals that would spell out how labor would be treated in a possible merger, eliminating that potential roadblock.

The issues were narrowing down to two big questions: How would the equity in the new company be split between US Airways and AMR interests? And who would run the new company?
The registration statement doesn’t elaborate on the discussions about governance, other than to note that they happened among the airlines, the unsecured creditors committee and the Ad Hoc Committee of AMR Corporation Creditors.

But on Jan. 24, Horton and Parker met to discuss the equity split and who would run the company. Horton said the 70-30 split supported by US Airways “was insufficient,” the statement says.
“Mr. Horton also informed Mr. Parker that, assuming a transaction, while he would support Mr. Parker as CEO of the combined company, the AMR board believed that the continued involvement of senior AMR executives and managers, including Mr. Horton as chairman of the combined company’s board, was important,” it added.

Three days later, AMR board member Armando Codina, the lead independent director, sat down with Parker. He told him that the 70-30 split had to improve, that AMR shareholders needed to get something in the merger, and that the merged company’s board needed to skew more toward AMR. Or to use the document’s wording, it needed “a board composition that more closely reflected the relative ownerships of AMR’s stakeholders and US Airways Group’s stockholders.”
On Jan. 28, the next day, Parker told Horton that US Airways was prepared to go to 72-28, and agreed to weight the board more heavily to AMR.

In a Feb. 4 telephone call, Parker told Codina that US Airways was prepared to drop its requirement that AMR eliminate its liabilities for “other post-employment benefits,” namely health care coverage for retirees. US Airways would accept the 72-28 split. Codina told Parker he would support the merger at 72-28.

On that call, Codina and Parker also talked about the idea of Horton being chairman for only a limited time after the merger.

Parker and Horton discussed the terms in an exchange of emails. Parker on Feb. 5 said his board backed the 72-28 split and wasn’t requiring AMR to get rid of the post-retirement benefits. In an email the next day, Horton said his board still supported a 75-25 split, but that he’d take US Airways’ proposal back to the AMR board.

Horton also agreed in general with the idea of who would run the company, but worried that American’s managers wouldn’t get a fair chance.
“Mr. Horton reminded Mr. Parker that AMR’s board still wanted assurance that the combined company’s management would be drawn from the ‘best of the best’ of each company, and that he and Mr. Parker would be jointly involved in selecting senior executives for the combined company,” the document said.

The next day, Parker told Horton via email that Parker “would consult with him in the selection of the management team for the combined company.” On Feb. 12, they agreed on the final arrangement in which Horton would be board chairman for a maximum of a year.

Horton, other American managers, Parker and Kirby met with the unsecured creditors on Feb. 11. Two days later, the UCC voted to support the merger.

The afternoon of Feb. 13, Parker met with the AMR board and “expressed his excitement and enthusiasm for the Merger, praised AMR’s brand, heritage and people, and affirmed his belief that consolidation would position the combined company to compete effectively with United and Delta.” He assured the board that he would pick executives from both airlines with assistance from Horton.

With Parker out of the room, the AMR board voted to approve the merger. In a subsequent meeting, the US Airways board endorsed the merger as well after its financial advisors said the offer was fair.
Before the markets opened on Feb. 14, the airlines announced the merger. Horton and Parker held a conference call with analysts at 7:30 a.m. CST, then met the news media at a mid-morning press conference. The pair stood before American employees at an early afternoon meeting before Parker headed home to Phoenix to meet with his employees.

And finally, on Feb. 22, AMR and American asked the U.S. Bankruptcy Court to approve the deal.

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