American-Northwest bargaining takes off


Thursday, July 13th 2000, 12:00 am
By: News On 6


Final price won't be too high, analysts say

Merger mania may have hit the airline industry, but investors shouldn't expect AMR Corp. to go bonkers in its bid for rival Northwest Airlines Inc.
News reports have placed a possible price tag for Northwest as high as $100 a share. But AMR, the parent of Fort Worth-based American Airlines Inc., isn't likely to pay much more than $60 a share, Wall Street analysts said Wednesday.

"All's fair in love and war, but American is not prone to bouts of irrationality," said Samuel Buttrick, an airline analyst at PaineWebber Inc. in New York. "If American paid over $60 a share, they would be making a mistake."

The $60 a share figure represents the high end of several analysts' takeover value for the nation's No. 4 carrier, which has been in discussions with American about a possible sale. Although Northwest is widely viewed as the most attractive acquisition target for American, analysts don't expect the No. 2 airline to pay an excessive premium if a deal materializes.

So far, investors appear to agree. They have bid up Northwest shares in recent weeks, but nowhere near $100. Northwest's stock climbed $2.13 a share Wednesday to close at $37.88. The stock has risen 31 percent from its closing price of $28.94 a share on May 24, the day merger speculation began when UAL Corp. announced it would buy US Airways Inc.

Shares of AMR closed at $30.63 Wednesday, up $1.19 a share. It has inched up 2 percent since May 24.

Price reportedly remains the sticking point in talks between the two carriers, with American seeking to do a deal at $44 a share and Northwest asking for $100 a share. Analysts said they expect it will take several weeks for the two sides to reach an agreement.

Spokesmen for both airlines declined to comment Wednesday.

American has been under pressure to counter the proposed acquisition of US Airways by UAL, the parent of United Airlines Inc. The $11.6 billion deal, which is subject to government approval, would strengthen No. 1 United's lead over archrival American.

American and Northwest are widely viewed in the industry as a good match. Northwest's northern hubs in Detroit and Minneapolis complement American's strong presence in the Southwest. Even more important, acquiring Northwest would give American overnight an extensive network of routes to Asia that it currently lacks.

"The key jewel that American would want in Northwest is the Pacific route authorities," said Raymond Neidl, an airline analyst at ING Barings Inc. in New York. "It would cause American to pay a slightly higher premium for Northwest."

He estimates Northwest's takeover value at $45 to $55 a share, but says that it wouldn't be surprising to see American pay as much as $60 a share to seal a deal.

"American could justify a price in the low $60s," Mr. Neidl said. "They do want the Pacific routes very badly. But American will not overpay for no reason."

In its proposed acquisition of US Airways, UAL agreed to pay $60 a share for the No. 6 carrier, a premium of 130 percent from US Airways' closing price of $26.31 a share on the day before the announcement.

A price of $65 a share for Northwest would give the carrier a valuation similar to that of US Airways at $60 a share, according to an airline valuation model developed by Aviation Advisory Service Inc., a New York financial consulting company specializing in the airline industry.

Although American and Northwest have complementary route networks, drawbacks exist from combining the two airlines, industry analysts say. Both carriers have experienced labor problems in recent years that have damaged their financial performance.

"The integration issues are going to be a nightmare," said James Altschul, president of Aviation Advisory Service. "The combined company would have more debt and would be considered more risky."

Any acquisition of Northwest by American also would face the same regulatory uncertainty now confronting United and US Airways. Industry experts remain divided over whether the U.S. Justice Department, the federal agency in charge of reviewing mergers, will seek to block such combinations because of fear they would stifle competition and hurt consumers.

Still, most experts are betting that it is only a matter of time before American and Northwest complete a deal.

"American is the best buyer for Northwest that's willing to pay the highest price," Mr. Buttrick said. "For Northwest shareholders wanting to cash out, this is going to be the best opportunity."