US Airways offers to buy Delta for $8 bln

NEW YORK (Reuters) - US Airways Group Inc. proposed an $8 billion takeover of bankrupt Delta Air Lines Inc. on Wednesday after an attempt at merger talks failed earlier this fall.

The combined company would have the most flights across the Atlantic Ocean of any U.S. carrier and rank No. 2 in flights to and from the Caribbean, US Airways said. It could also lead to more airline mergers and prompt other offers for Delta.

"This is not value that either of our companies can create independently," US Airways Chief Executive Doug Parker said on a conference call. "If we wait for Delta to emerge from bankruptcy, it will be too late."

Delta, the No. 3 U.S. airline with over 47,000 workers, said on Wednesday it intends to emerge from bankruptcy as a stand-alone carrier.

"We received a letter from US Airways this morning and will of course review it," Delta CEO Gerald Grinstein said in a statement.

US Airways shares rose 16.1 percent after touching $59.45, the highest since its September 2005 merger with America West. Delta shares rose 10.2 percent in afternoon trade. The news also boosted shares of other airlines, with the Amex airline index up 5.5 percent.

US Airways, the No. 7 U.S. airline with over 35,000 employees, said the combination would generate at least $1.65 billion in annual savings. It expects a transaction to close by the first half of 2007.

SORT OF HOSTILE

"This appears to be sort of like a hostile takeover," CreditSights analyst Roger King said. "US Airways is appealing directly to the creditors."

Under terms of the offer, Delta creditors would receive $4 billion in cash and 78.5 million shares in US Airways, with an aggregate value of about $4 billion based on Tuesday's closing stock price. After a merger, Delta's unsecured creditors would own about 45 percent of the combined company, US Airways said.

Delta's 8.3 percent bonds due in 2029 rose 20 cents on the dollar to 60.25 cents, while the yield fell to 15 percent, according to MarketAxess. Airline bonds, led by Delta, were the most actively traded bonds on Wednesday.

"There is some room to increase the consideration," said Clark Orsky, a bond analyst with KDP Investment Advisors. "At least it's an indication that unsecured noteholders like what they see in this offer."

US Airways has obtained $7.2 billion in committed financing for the deal from Citigroup. Citigroup is also advising US Airways on the offer

"It will be very tempting -- it's got a cash component," said Fruman Jacobson of Sonnenschein Nath & Rosenthal, which represented the creditors' committee in UAL Corp.'s United Airlines bankruptcy. "It is very unusual."

MORE OFFERS SEEN

With two major U.S. carriers -- Delta and Northwest Airlines Corp. -- operating in bankruptcy and with overcapacity in the industry, analysts have been expecting consolidation and said the offer could lead other airlines to join the fray.

"My sense is that clearly US Airways is underpaying compared with what Delta might get in an open market," said Frank Werner, an airline finance and management expert. "It opens up opportunities for a United, for example, to come in and top the offer."

United and Delta together could have a more expansive reach domestically and internationally, while a combination with US Airways would have more overlap, analysts said.

"Merger synergies are much better with United," CreditSights' King said. "This is the right time, but the wrong airline."

Parker and UAL's CEO Glenn Tilton had previously approached Delta, operating under Chapter 11 protection since September 2005, about a merger, but Grinstein was not interested.

Parker broached merger talks with Delta in a September 29 letter to Grinstein. According to Parker, Grinstein had "declined to meet or even enter into discussions."

ANTITRUST CONCERNS

The offer is likely to be closely watched by the U.S. Justice Department, experts said.

"The big concern is government regulators, if they give the green light," Calyon Securities Ray Neidl said. "If they do, it will probably set off a series of potential M&A activity in the industry."

Parker, who in 2005 orchestrated the takeover of then-bankrupt US Air by America West, has the right credentials, analysts said.

Parker said he expected Delta management to ultimately see a merger as a better alternative to remaining alone.

"We need to start working with Delta to do due diligence," Parker told Reuters in an interview on Wednesday, adding that he had not heard from the company. "What we believe will happen is that creditors see the value of this proposal."

"This is just sort of the first step in a long dance," Kenneth Jacobs, deputy chairman and head of the U.S. operations for Lazard Freres & Co., told the Reuters Investment Banking Summit. "There are a lot of different ways this could play out; this is kind of like the opening scene."

In later afternoon trade, US Airways shares were up $7.31 at $58.24 on the New York Stock Exchange, and Delta shares were up 14 cents at $1.61 in over-the-counter trading.

Other airline shares also rose, including Airtran Holdings Inc., up 16.08 percent; JetBlue Airways Corp. up 7.81 percent; UAL Corp. up 9.16 percent; and Southwest Airlines Co. up 4.33 percent.

(Additional reporting by Herbert Lash, Walden Siew, John Crawley and Caroline Valetkevitch)