Takeover bid a test for Delta's savvy CEO

Source: The Atlanta Journal-Constitution

The last time Gerald Grinstein was running an airline and pulled it from a financial mess, he said he wanted it to remain independent. A few months later, Grinstein, then the chief executive of Los Angeles-based Western Airlines, announced an $860 million deal to merge the revived carrier with Delta Air Lines. That was 20 years ago. Now, Grinstein is running Delta. And again he says he wants it to remain a stand-alone carrier. But just as Delta's Chapter 11 recovery effort appears to be gaining strength, Grinstein's resolve for independence is again being tested. US Airways' unsolicited $8.5 billion takeover bid for Atlanta-based Delta, announced Nov. 15, dumped a sudden storm in Grinstein's flight path. To push back the bid, Grinstein needs to convince the airline's key creditors that their stake will be more valuable if it's in an independent Delta than in one being merged with US Airways.

Grinstein has not given any interviews or made public appearances since the takeover dogfight erupted. Bill Morey, who represents reservations workers before Delta's board and senior management, said he spoke with Grinstein a few hours after the US Airways announcement.
Grinstein seemed frustrated, not worried, Morey recalled. "He did say that this is something that we don't need to be dealing with right now, we are trying to get our house in order."
To fight off US Airways, Grinstein will be pushed to work every angle he's learned in his long career as a top congressional aide, lawyer, investor and chief executive. US Airways presented its offer to representatives of Delta and its creditors last week in New York. Delta will effectively make its counteroffer to the creditors when it files an independent reorganization plan, which it hopes to present before the holidays. Grinstein was apparently blindsided by US Airways' tactics. The 74-year-old twice rebuffed his 45-year-old counterpart at US Airways, Doug Parker, when the Tempe, Ariz.-based airline approached Delta privately earlier in the year.
Parker's interest didn't fade, though. US Airways executives code-named the takeover attempt "Green," the color that results from combining Delta, dubbed "Blue," with US Airways, labeled "Yellow."

Grinstein was at his home in Atlanta on the morning of Nov. 15, preparing for breakfast with his wife, when he heard a radio report about Parker's public announcement of a takeover bid —- a tactic that effectively put the issue directly in front of creditors and whipped up market enthusiasm. US Airways is offering the creditors $4 billion in cash plus US Airways stock worth the balance of the deal's value. The combined carrier would be named Delta, but Parker hasn't said where the company would be headquartered. Many Delta workers worry about what's ahead, especially after weathering years of sharp cutbacks. But US Airways' offer already appears to be far richer than what unsecured creditors got in the bankruptcies of either United Airlines or US Airways last year, according to Darryl Laddin, a bankruptcy attorney with Arnall Golden Gregory in Atlanta. Grinstein and his Delta lieutenants have a little time to review the proposal and then try to craft a proposal creditors will find better. "It really comes down to money," Laddin said. "You know the old saying: 'What have you done for me lately.' "
Dean Booth is an attorney representing retired pilots with perhaps $800 million in claims in the bankruptcy case. He's known Delta's CEO since Grinstein was a congressional aide, and he knows his powers of persuasion. "I don't think anybody with this size debt is going to base it on personality, because if charm was the issue, Jerry would win all contests," said Booth.
Creditors will try to figure out who will provide the best management in which to invest, Booth said. That's a question that doesn't include Grinstein, who is expected to retire.
"The issue everybody is going to be trying to decide is basically whose stock is worth the most," Booth said. The calculation would include not only upfront cash but also predictions about how the value of the stock in a combined company or a stand-alone Delta will fare over time. Also, creditors have to factor in the risk of federal regulators nixing the merger or forcing the sale of some operations to avoid anti-competitive concerns. Becoming a hostile takeover target apparently isn't the kind of position Grinstein intended to be in.

He fought a stressful and ultimately unsuccessful battle to keep Delta out of bankruptcy court —- a move that in hindsight gave US Airways time to complete its own stay in bankruptcy court and consummate a combination with the smaller, Parker-led America West Airlines last year.
Michael Palumbo, who was Delta's chief financial officer until just before its bankruptcy filing in September 2005, recalled that Grinstein was "absolutely committed" to Delta remaining independent. But you're "far more likely to be prey than predator when you are in the bankruptcy process," Palumbo said. After more than a year in court, painful cutbacks and a renegotiated pilot contract, clear skies seemed just ahead. Grinstein predicted Delta would exit court in the first half of 2007. Days before the US Airways announcement, Delta reported its second consecutive quarter of profits. Grinstein, an influential Delta board member who became CEO after a management shake-up in late 2003, said that after safely landing the airline he would retire and "wander off into the sunset someplace," returning to his Seattle home to dote on grandkids and indulge his passions for fly-fishing and the arts. Now, Delta officials contend that US Airways' moves may keep Delta in bankruptcy court longer.

Grinstein himself has predicted airline mergers are coming. In 2004, he mused that in five years there might be only two major national carriers left. He said he hoped one would be Delta. But more recently he's sounded a more cautious theme, noting that airline mergers are notoriously difficult and that he thinks the number of major players will remain stable for at least another couple of years. Past Delta executives and others who know Grinstein say they believe he sincerely wants to get the carrier out of bankruptcy on its own and leave his successors in a stronger position, which might allow them to consider acquisitions where Delta would be in control. When Grinstein took the Delta job, friends voiced misgivings. But Grinstein said he thought he could rescue Delta. "If I were in his shoes, I think he is thinking he wants to be the one who brings it out," said Hollis Harris, a former Delta president who later ran Continental Airlines and Air Canada. "That would be quite an achievement for him." Morey, the worker representative on Delta's board, said Delta's chief will fight the takeover of an airline he feels so close to and sees so much value in: "There's no way that Jerry Grinstein would give up Delta."
Morey worked for the old Western Airlines when Grinstein merged it with Delta, a decision that Morey sees as an entirely different situation. Delta is still in bankruptcy court. Grinstein had successfully pulled Western out of financial turmoil through deals with its unions. He had told reporters he preferred to keep Western independent and even spoke of the carrier's board considering possible anti-takeover measures. But he also hinted at the difficulty of Western flying alone as other airlines grew bigger. In 1986, he announced the deal to combine with Delta. It turned out to be a relatively smooth pairing, as airline mergers go.

"This is a model of what mergers ought to be," Grinstein said at the time, according to the Los Angeles Times. "It's a strengthening of what both companies should be competitively."
Grinstein has been on the Delta board ever since, even as he led railroad giant Burlington Northern, which he eventually merged with Santa Fe Pacific. He's said to feel a deep bond with Delta's workers, including former Western employees. Nonetheless, Morey —- who thinks the US Airways deal is a bad idea —- predicts Grinstein won't let his soft spot for Delta get in the way of his fiduciary duties to the airline's creditors. "As awful as the things he's had to decide to do in this bankruptcy, he is not going to let his heart sway him in what needs to be done in a business situation," Morey said. Laddin, who represented the trustee in Eastern Airlines' bankruptcy case, said Delta is at a fork in the road. If the airline and creditors wind up in negotiations with US Airways, Delta could attract other suitors. "If they entertain a bidding process, my guess is that there is no going back," Laddin said. "The process would gain sufficient momentum with bidding increasing the price that it would be very difficult" for Delta to remain independent. Either way, for Grinstein and for Delta the drama is still unfolding. "The US Airways offer isn't the end of the story," Laddin said. "It's more like the beginning."

THE BATTLE FOR DELTA

How Delta or US Airways wins:
> Lobby unsecured creditors. Focus on the value of bankruptcy payouts as well as deeper financial stakes each creditor has. The Delta pilots group—-a major creditor —- could consider whether a combined or stand-alone company would retain more Delta pilot jobs. Equipment and plane suppliers could consider which entity will be a better future customer and which scenario might be the best for the airline industry.

> Lobby federal regulators. Persuade regulators or powerful congressional leaders to hint at whether they see antitrust problems with a combined Delta-US Airways. That could affect creditors' confidence in the deal going through.

> Win support of Delta bondholders, some of whom may be betting on short-term gains.

> Win in the court of public opinion. Persuade influential players and pundits to speak publicly about the proposal or airline mergers in general. Rally support from employees and fliers or foment discontent among the other airline's employees and customers.

POSSIBLE LEGAL MOVES
> Delta could convince its bankruptcy judge that US Airways' offer violates management's exclusivity period for producing a reorganization plan. But even if Delta succeeds, it might only be a delaying tactic, dragging out its bankruptcy case.

> US Airways could persuade creditors to ask the judge to put an early end to Delta's exclusivity period for presenting a reorganization plan, allowing consideration of its competing plan.