AMR Corp (AAMRQ.PK) could face months of new restructuring talks, with shareholders likely to suffer the biggest blow, if its merger with US Airways Group LCC.N is successfully blocked by the U.S. government, according to people close to the bankruptcy proceedings and experts.
The Justice Department on Tuesday sued to stop American Airlines' parent from combining with US Airways, saying the proposed tie-up would reduce competition and hurt consumers by leading to higher airfares and fees. The two airlines vowed to defend the $11 billion deal in court.
If the government succeeds, it would send AMR, which has been in bankruptcy since 2011, back to the drawing board to figure out how to pay back creditors, fund a restructuring and improve its business model.
"It would basically be a second bankruptcy," said Stephen Lubben, a bankruptcy expert and professor at Seton Hall University School of Law.
Some of AMR's financial issues were resolved before the merger was announced in February. Most notably, the company had reached money-saving labor deals with the unions after months of bitter talks, so they are not contingent on the merger.
It is too early to tell exactly how creditors would fare if the US Airways deal collapses. But experts said shareholders would be the hardest hit as they were poised to get a 3.5 percent stake in the merged company, making AMR's bankruptcy one of the few in which shareholders did not walk away empty-handed.
A person close to the bankruptcy proceedings said he could foresee no other scenario in which existing shareholders get anything.
Another potential loser is AMR Chief Executive Tom Horton. Under the merger, he would cede the top slot to US Airways head Doug Parker and take nearly $20 million in severance.
In a stand-alone restructuring, equity would likely go to current creditors, which usually leads to new management. And there is no guarantee Horton would get his severance package, which would have to be renegotiated if the merger failed.
AMR's management had initially wanted to exit bankruptcy on their own, and only agreed to the US Airways deal under pressure from creditors. But AMR has a fiduciary duty to create the most value for its bankruptcy estate, which people involved in the bankruptcy said means supporting the merger.
Rehashing AMR's bankruptcy could take months or years, adding millions of dollars in professional fees that had already topped $230 million as of June.
AMR is scheduled to present its restructuring plan to Judge Sean Lane in U.S. Bankruptcy Court in Manhattan on Thursday for final approval. In theory, Lane could approve the plan, contingent on the merger going ahead. But experts said the judge is more likely to impose some sort of delay.
A settlement with the Department of Justice could involve major changes to the plan, and Lane may not want to rubber-stamp it until it is clear what those changes are, said Professor Lubben.
Lane must also declare the plan viable to give it his approval, but that viability could now be undermined by the DOJ's challenge, Lubben said.
AMR has said it would like to resolve the antitrust case as soon as possible. But even if the District Court for the District of Columbia expedites proceedings, the case could still take months or even years to resolve.
"Their options are probably either to consider a stand-alone or negotiate a settlement with the government quickly," Lubben said. "They can't let this thing go to trial because antitrust trials take years."
It is possible the matter will be fast-tracked, since a big chunk of discovery was already completed in the course of the DOJ's investigation, said one of the people close to the matter.
"The Justice Department has gotten millions of pages of documents, and taken about a half-dozen depositions," the person said. "AMR wants to push for a rapid trial."
The sources in this story did not want to be named because the discussions are not public and are ongoing.
(Reporting by Nick Brown; Editing by Eddie Evans and Phil Berlowitz)