UPDATE 2-AirTran raises Midwest bid to $16.25 per share

(Adds details, background, AirTran COO comment)

By Kyle Peterson

CHICAGO, Aug 14 (Reuters) - AirTran Holdings Inc. (AAI.N) on Tuesday raised its offer to buy Midwest Air Group Inc. MEH.A by 3 percent to about $445 million in a last-ditch bid to win control of the rival airline after a major Midwest shareholder objected to a proposed buyout led by private equity firm TPG Capital.

The increase to $16.25 per share from $15.75 marked the fourth time AirTran has raised its offer in its eight-month pursuit for Midwest in the face of strong resistance from Midwest's management.

Midwest, which has rejected previous offers from AirTran, said in a statement it would take the revised offer under consideration. The AirTran bid tops a $16-per-share bid from TPG.

AirTran said it raised its offer at the request of Midwest shareholders.

"They believe our deal is superior," AirTran Chief Operating Officer Bob Fornaro told Reuters.

On Sunday, AirTran said it had let its bid expire. Midwest later said it had accepted a buyout offer from TPG Capital, backed by Northwest Airlines Corp. NWA.N.

Midwest has said repeatedly that it has more value as a stand-alone airline. An AirTran takeover would absorb Midwest into the company.

AirTran did not specifically name the Midwest shareholders that requested a higher bid. But Pequot Capital Management Inc., a large shareholder in Midwest, said in a letter on Monday it had "significant concerns" about Midwest's decision to pursue the TPG Capital deal.

"We believe an announced deal with Midwest would cause the value of the AirTran offer to exceed, in a very short time, the $16 indication of interest you have currently deemed to be superior," Pequot Capital said in the letter to Midwest's board that was filed with the U.S. Securities and Exchange Commission.

Last month, another large institutional investor in Midwest, Octavian Global Partners, encouraged the airline to enter talks with AirTran.

AirTran said its latest offer consisted of $10 in cash plus 0.6056 of a share in AirTran, equaling $16.25 per Midwest share. Fornaro said the current offer has no set expiration date.

The airline industry has been battered in recent years by soaring costs and low-fare competition. Some airline leaders have said consolidation and capacity cuts are the keys to achieving stability.

AirTran, however, has been adding capacity at a rate of more than 20 percent per year for the last four years and says its interest in Midwest has to do with fleet and route compatibility, not capacity cuts.

Fornaro said AirTran's intention is to use Midwest to spur growth. TPG cannot get a return in its investment in Midwest without cutting the airline "to the bone," he said.

Midwest's shares closed down 4 cents at $13.96 on the American Stock Exchange on Tuesday.