Northwest’s deal for Midwest Air likely will raise antitrust challenge

The successful offer came from TPG Capital (formerly Texas Pacific Group), a private equity investment firm. Northwest Airlines has confirmed its minority investor status in the successful bid, though it hasn’t disclosed its actual ownership stake.

As TPG and Northwest courted the Milwaukee-based Midwest, Joe Leonard, AirTran’s president, warned, “Antitrust issues may prevent a deal with Northwest from ever closing.”

The immediate benefit to Northwest from the pending deal is apparent: It would block Orlando, FL-based AirTran’s strategy to enter the Upper Midwest market by establishing a Milwaukee base between Northwest hubs in Detroit and Minneapolis.

Leonard’s warning alludes to further benefits for Twin Cities-based Northwest.

With the TPG Capital bid, Northwest stated it “will not participate in the management or control of Midwest.”

Still, there are many ways Northwest can influence Midwest’s management, said Albert Foer, president of the American Antitrust Institute in Washington D.C. “Any way from communicating to the board or operational officers, directly or indirectly, winks and nods, general mutual understanding,” he said.

He said the U.S. Justice Department’s Antitrust Division — which could try to block the sale — is inexperienced in dealing with “indirect mergers” such as the Northwest-Midwest deal. “The antitrust division has not been very aggressive in its analyses,” he said. “Its general attitude on anything other than collusion is lax right now. Count the number of mergers it’s opposed and you won’t get a large number.”

Together, Northwest and Midwest control 70 percent of the market at Mitchell International Airport in Milwaukee. (Midwest carries 50 percent of the passengers to and from the airport; Northwest carries 20 percent.) But the Antitrust Division looks only at route competition in analyzing mergers, and the two airlines compete on just one direct route, Minneapolis-Milwaukee.

The deal, approved by the three parties — Midwest, TPG Capital and Northwest — is expected to close by the end of the year, pending shareholder and regulatory approval. The TPG-Northwest all-cash bid of $17 per share deal ($450 million) ended a bidding war and trumped Airtran’s final stock-and-cash offer of $16.27 per share.

The Midwest board voted unanimously to accept the TPG offer even though three directors elected in June were nominated by AirTran. Board directors are legally bound to vote in accord with what best serves shareholders.

In 2005, Northwest Airlines fought Midwest for domination of its home base, Mitchell International. The two airlines also compete in the Duluth/Superior market, where Midwest launched service at Duluth International Airport in March.

Northwest has a cooperative deal with Midwest in which the airlines share frequent flier miles and allow passengers to book flights with both airlines on one ticket.

Richard Schifter, a TPG Capital partner, said his group eventually will sell its stake in Midwest. The buyer could be Northwest, in which case the deal would be subjected again to Department of Justice review.

TPG, along with Air Canada, acquired the bankrupt airline Continental in 1993 and helped it become profitable. Five years later TPG sold part of its stake in Continental to Northwest at 10-times the $70 million buying price. Northwest ultimately gave up most of its stake in Continental under pressure from federal regulators.

The Antitrust Division’s record on airlines under President Bush has been mixed. While many observers expected the division to let most mergers slide by, it showed an unexpectedly tough stance early on in Bush's first term, by continuing a case started under President Clinton.

In 1999, the Justice Department accused American Airlines of driving competing airlines out of the Dallas-Ft. Worth market through predatory pricing. American raised its prices again after the competition was forced to quit.

A federal district court dismissed the case, but in April 2001 the Antitrust Division under Bush filed an appeal, though it eventually lost.

The case may have been an anomaly.

The appellate challenge was made acting assistant attorney general John Nannes, a holdover from the Clinton administration. Two other Justice officials had to abstain due to conflicts of interest: Solicitor General Theodore Olson’s former law firm represented American Airlines, and antitrust division chief Charles James had previously represented airlines in antitrust cases. But Paul Clement, Bush’s deputy solicitor general, approved the Nannes recommendation.

Just a month earlier in March 2001, the Antitrust Division declined to challenge American’s acquisition of Trans World Airlines (TWA).

In the same year, the Justice Department blocked the merger of U.S. Airways and United Airlines, both of which later went into Chapter 11 bankruptcy. In 2005 the department okayed the merger of U.S. Airways and America West.

The Justice Department came under heavy criticism in 2006 when it cleared Whirlpool’s $1.7 billion acquisition of Maytag, resulting in the new entity controlling three-quarters of the U.S. market for some home appliances. Microsoft’s 2001 antitrust settlement and AT&T’s 2006 acquisition of BellSouth also are often cited as examples of weak antitrust enforcement.

An unrelated event this week already is spurring speculation of a future airline merger, and its potential link to the outcome of the Northwest-Midwest deal.

Delta Airlines confirmed former Northwest Airlines chief executive Richard Anderson will take the top spot on effective Sept. 1. Anderson, an executive vice president at UnitedHealth Group, also is a Delta board director.

The hiring has renewed speculation of a Northwest-Delta merger, which Anderson has tried to quash. “There are no plans or intentions or previously agreed-to plans to merge," he said.

Rumors of a potential Northwest-Delta merger began as both airlines filed for bankruptcy protection in September 2005, a process from which both have since emerged.

Rising fuel prices and personnel costs, competition from such discount carriers as AirTran, and post-9/11 turmoil in the airline industry all contributed to the airlines’ financial ills. Delta emerged from bankruptcy on April 30; Northwest on May 31.

As it was nearing its exit from Chapter 11 in January, Delta successfully fought off a hostile takeover attempt by U.S. Airways.