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Monday, May 5, 2008

XJT Bidding War Unlikely

SkyWest Vice President Mike Kraupp told Regional Aviation News that a bidding war for the acquisition of ExpressJet (XJT) is unlikely since Continental must approve the deal and it has already cut a capacity purchase agreement with SkyWest dependent on the acquisition. Related Story
The statement came after an action-packed week in which ExpressJet rejected an acquisition offer by SkyWest and SkyWest revealed just how much pressure was being put of ExpressJet from Continental. While both XJT and SkyWest are examining their options, the question remained as to whether a company like Republic, which won 25 percent of ExpressJet’s Continental work in 2006, might get into the fray. Republic could not be reached for comment at press time, but CEO Bryan Bedford recently told investors that the company was looking for domestic opportunities, citing it as a reason not to reduce cash on hand. Related Story
“While it is certainly possible, I don’t think it probable,” said Kraupp. “If you look at the carriers, there are not a lot of players. But the key driver is Continental’s approval of whoever is going to use their code. They have already come out with a decision.”
Kraupp could not say who approached whom on the new CPA. “We’ve had a business relationship over the last 10 to 12 years,” he said. “We had a dual code share relationship between Continental, Delta and SkyWest in the 1995 to 1997 time frame and, a few years ago, we did some turboprop flying for Continental in and out of Texas markets with a fleet of 15 or so aircraft. We’ve been talking on and off for some time about exploring an opportunity and I think it was a mutual effort born out of an opportunity. Continental has been trying to work with ExpressJet for some time to reduce the cost of the operation and there have been lots of negotiations back and forth. It is just an opportune time for both of us to get together to see if we can come up with something more productive for Continental.”
He would not discuss the margin afforded by the proposed SkyWest/Continental agreement, adding it was part of the negotiations. On whether XJT can now go back to Continental and cut its own deal, he said the key point is the fact that Continental has been trying to do this for three years. “There’s one school of thought that ExpressJet may be coming to table too late,” he said. “But Continental has to evaluate that and they are in the driver’s seat. The point ExpressJet management should take into consideration is the fact that Continental is serious and so is SkyWest.” ExpressJet has been advised by attorneys not to comment beyond what it said in its press release.
Kraupp would not say whether SkyWest would better its offer which represents a 50 percent premium of the price of XJT stock prior to the offer. “The stock retreated further after April 7 and our offer gained in value,” he noted. “Although we are disappointed, it is not surprising what they are trying to do. They are trying to maximize share holder value. We provided and put an offer on the table we considered to be fair and full value, now the ball is back in our court to determine how and if we proceed.”
The action by Continental which once owned the entire ExpressJet operation before spinning it off in the post 9/11 period, is a measure of just how competitive the regional airline industry has become. In a letter dated April 7, Continental notified ExpressJet that unless it could finally cut a deal on the rate for their Capacity Purchase Agreement tantamount to the savings represented by SkyWest, another 51 aircraft would be taken from the regional partner when its current agreement becomes amendable on December 31, 2009. Their current contract terminates the following year and the major carrier has already told XJT that it does not intend to extend their relationship meaning that all 205 aircraft it now operates for Continental will go to another carrier. Express Jet, which has long been negotiating a new rate with Continental, is holding out for a higher price owing to the fact that Continental holds a golden share in its former wholly-owned subsidiary.
In SkyWest’s statement on the deal it said that its proposal was not subject to a financing condition, but was subject to the completion of due diligence, certain clarification or amendments to the collective bargaining agreement between ExpressJet and its pilots and certain other customary approvals and conditions. The airline said it is disappointed that ExpressJet's Special Committee rejected SkyWest's premium proposal. It also said that it is dismayed that ExpressJet did not honor SkyWest's request to begin due diligence. SkyWest intends to review its alternatives which could include, among other things, altering or withdrawing its proposal and/or not participating in any formal process established by the Special Committee and its advisors. ExpressJet, in its announcement last Friday, did not completely foreclose a deal but held out the promise that a higher per-share price could do the trick.
"We believe our offer is consistent with our strategy of pursuing viable opportunities to enhance shareholder value, while also offering value to Continental through a new code-share relationship" commented Bradford R. Rich, SkyWest executive vice president and chief financial officer. "Based upon the information available to us, and subject to the completion of due diligence which we hope to undertake promptly, we believe a transaction can be structured with ExpressJet which would be accretive to our shareholders."
Jerry Atkin, SkyWest's chief executive, said, in a letter to ExpressJet officials, that the offer constituted a "full and fair price" for the ExpressJet shares. Indeed, he foreshadowed these events during an interview with Regional Aviation News when he said any regional with a termination date for capacity purchase agreements in the next couple of years is at risk. The earliest termination date for SkyWest relates to its United agreement in 2011. "We believe that our proposal would be in the best interests of ExpressJet and its stockholders, particularly given the uncertainty in the airline sector, the high price of oil and, as outlined in your public filings, the risks of your business related to your relationship with Continental," Atkin wrote.
ExpressJet, which mainly operates regional flights under contract to Continental Airlines and Delta Air Lines, said the special committee has begun a full review of the company's available alternatives. The review will include discussions with SkyWest and other potentially interested parties about the possible acquisition of the company at a higher price, as well as discussions with Continental about a new capacity purchase agreement, ExpressJet said.
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