Two Carriers Exchange Lawsuits in Federal Court

The attempted hostile takeover of Atlantic Coast Airlines Holdings [Nasdaq: ACAI] by Mesa Air Group [Nasdaq: MESA] heated up last week when Mesa filed a complaint against ACA, alleging that ACA and its board of directors set an unreasonably early deadline for shareholders to consider the bid. The deadline establishes when individuals must own shares of ACA in order to vote on Mesa's offer. Mesa said the deadline would prevent some shareholders from voting on Mesa's proposed takeover.

ACA set a "record date" of Oct. 23, meaning that anyone who bought ACA shares after that date would be ineligible to vote on any proposed takeover. Mesa argued in a complaint filed in Delaware chancery court, where corporate disputes are often heard, that the law requires ACA to give its shareholders more time.

By setting an earlier date than Mesa wants, ACA limits the time available to Mesa to buy more Atlantic shares. It also allows less time for Mesa to attract other sympathetic shareholders to ACA stock in anticipation of the takeover.

Mesa is asking the court to declare that the Oct. 23 deadline violates ACA's by-laws, and constitutes a breach of the ACA board of directors' fiduciary duties it owes to its stockholders under Delaware law.

ACA responded that it had not yet been served with the complaint filed by Mesa and would not comment on it. But ACA did respond to a press release issued by Mesa regarding Mesa's allegation that ACA manipulated the deadline.

"Mesa's allegations are baseless," ACA said in a statement. "ACA, in setting the record date, has acted in accordance with applicable law and with its own by-laws and ACA's board of directors has acted consistently with its fiduciary duties. ACA will contest these reported allegations vigorously."

Mesa's filing of the complaint Oct. 29 followed ACA's filing of a lawsuit Oct. 28 to try to block the hostile takeover. ACA alleged in its court filing that Mesa had made "materially false and misleading statements and omissions in violation of federal securities laws" in its takeover offer. ACA also said Mesa had engaged in questionable stock trading prior to the offer, and had broken securities laws by failing to disclose that United Airlines [OTC: UALAQ] was allegedly working behind the scenes to support Mesa's takeover. Mesa denied the claims, and both United and Mesa denied that United helped launch Mesa's bid.

"United Airlines reaffirms categorically that it did not participate in Mesa Air Group's offer to acquire ACA, and to suggest otherwise is baseless and irresponsible," United said in a statement. "In fact, United expressly declined Mesa's invitation to participate in its offer."

ACA announced last July that it would break its longstanding code-share agreement with United and re-establish itself as a new, independent low-fare carrier based at Washington's Dulles International Airport (CRAN, Oct. 13).

"Because ACA insists on pursuing its new strategy, it is only prudent now for United to examine all of its alternatives, including beginning discussions with Mesa regarding United Express service in the event Mesa acquires ACA," United said.

The carrier added that its senior executives "negotiated extensively and in good faith" with ACA to try to reach a competitive United Express agreement similar to those the airline has reached with other regional carriers (CRAN, Oct. 6,; July 21). "We presented multiple enhanced offers to ACA and remained in discussions until Oct. 16, a day prior to ACA's board meeting. However, ACA's management made clear that ACA -- not United -- would not negotiate further," United said.

ACA wants its shareholders to stick with the carrier's plan to reorganize itself as an independent, low-fare carrier. The company has asked its shareholders to reject Mesa's offer.

In ACA's Oct. 28 complaint against Mesa, filed in the U.S. District Court for the District of Columbia, the carrier asks the court to order Mesa to correct its "material misstatements and omissions," and to prohibit Mesa from taking its takeover offer directly to ACA shareholders.

Among the omissions cited by ACA were: 1) Mesa's financial position and its reason for proposing to acquire ACA; 2) questionable trading in Mesa stock by Mesa's chairman and CEO, Jonathan Ornstein, and other Mesa "insiders," shortly before the announcement of Mesa's takeover bid; 3) the inappropriate "short-swing" trades in which Mesa "insiders" have allegedly engaged; 4) the "self-dealing" and lack of independence of Mesa's board of directors; and 5) the "lack of independence" of several of Mesa's nominees to ACA's board of directors (CRAN, Oct. 20).

ACA alleges that Mesa's proposed plan to acquire all of the outstanding shares of ACA's common stock is nothing more than an attempt by Mesa and its "undisclosed backer," United, to prevent ACA from establishing a low-fare airline that would compete directly against United and Mesa. The takeover also would eliminate the "significant hurdle" to United's efforts to emerge from bankruptcy, which has resulted from United's "inability to negotiate an agreement for ACA to continue operating United Express for United," ACA said.

ACA pointed out that during Ornstein's conference call with securities analysts on Oct. 7, Ornstein "acknowledged contacting United prior to making its expression of interest to the ACA board."

ACA surmised that Mesa is attempting the hostile takeover because "Mesa is having problems financing additional aircraft purchases, a cornerstone of its growth plans." Mesa had about $150 million in cash on hand as of June 30, according to the Raymond James brokerage firm.

ACA believes that Mesa is seeking control of ACA so that Mesa can gain the use of ACA's cash reserves, which are expected to reach more than $200 million by year end. "Mesa's desire to acquire ACA so it can use the company's cash to resolve Mesa's own financial difficulties is material information that should have been disclosed to stockholders and the market," ACA said.

Ornstein and other Mesa "insiders" sold a substantial number of Mesa shares in September 2003, ACA alleged, shortly before Mesa announced its takeover attempt of ACA. The sale of Mesa shares by Mesa's directors just prior to the takeover announcement diverges from their positive view of Mesa's future, as well as the prospects for a successful merger with ACA, ACA said.

ACA claims that seven of Mesa's nominees for its proposed new ACA board of directors have had, and may continue to have, outside business relationships with Mesa, including lucrative consulting contracts, "which compromise their independence and judgment," ACA said. These nominees "suffer conflicts of interest that would impair their ability to fulfill their fiduciary obligations to ACA," ACA said.

Credit Suisse/First Boston analyst James Higgins reiterated his belief that Mesa will prevail in its pursuit of ACA. The brokerage firm also sees any likely deal as improving Mesa's long-term growth rate and balance sheet.

"When we look at [ACA's] list of concerns about the Mesa deal, none rises, in our view, to the level of placing the deal at substantial risk," Higgins wrote in a report on the proposed takeover. "We are all the more skeptical of [ACA's] new business plan after comparing its unit cost forecast to actual costs at low-cost, low-fare AirTran [NYSE: AAI], an airline we believe is more comparable than any other."

ACA's unit cost goal "simply does not pass a test of reasonableness," Higgins said. He said he also has concerns about ACA's revenue projections.

But Robert Ashcroft, a regional airline analyst at UBS Investment Research, cast doubt on the likelihood of a successful takeover.

"The market thinks Mesa will pay up for ACAI," Ashcroft wrote in a report on the proposed takeover. "We think it's wrong. We think a United deal with ACAI (after its board is removed) is better for United, Mesa and potentially ACAI than a Mesa-ACAI merger.

"United need only assert itself to direct this outcome. An independent ACAI is both preferable and more valuable to United than one under Mesa control," he said.

Ashcroft noted that Mesa is the fastest-growing regional airline and one of the most efficient, while ACA has "no growth and expensive pilots."

A merger involving Mesa and ACA would result in a company that "would be slower growing, have arguably reduced growth prospects and potential labor problems. And we believe United will amply compensate Mesa for standing aside."

Even if the takeover goes through, Mesa "won't pay up," Ashcroft predicted. "A paucity of bidders means Mesa won't up its price beyond what's polite. We think any other bidder needs United's OK, and why should United give that when its money is on Mesa?"

An independent ACA is more valuable to United than one under Mesa control, Ashcroft said. Mesa simply "is worth more" without ACA, given ACA's higher labor costs, he said.

>>Contact: Jonathan Ornstein or Peter Murnane, Mesa, 602-685-4000; Steve Lipin or Tim Payne, the Brunswick Group, 212-333-3810; Rick DeLisi, ACA, 703-650-6550; United Airlines public affairs, 847-700-5538; James Higgins, Credit Suisse/First Boston, 212 538 3456; Robert Ashcroft, UBS Investment Services, 203-719-6064.<<

Mesa & Atlantic Coast: Tale of The Tape

Atlantic Coast Airlines (ACA) [Nasdaq: ACAI] has a fleet of 148 aircraft, including 120 regional jets, and offers more than 840 daily departures, serving 84 destinations in the United States and Canada. ACA employs about 4,600 aviation professionals. The Washington Dulles-based carrier operates as United Express and Delta Connection in the Eastern and Midwestern United States and Canada. The company is headed by Chairman and CEO Kerry Skeen. For more information on the Web, visit: http://www.atlanticcoast.com .

Mesa Airlines [Nasdaq: MESA] currently operates 150 aircraft with 938 daily system departures to 163 cities, 40 states, the District of Columbia, Canada, Mexico and the Bahamas. It operates in the West and Midwest as America West Express; the Midwest and East as US Airways Express; in Denver as Frontier JetExpress and United Express; in Kansas City with Midwest Express, and in New Mexico and Texas as Mesa Airlines. The Phoenix-based company has about 3,300 employees. The carrier is headed by President and CEO Jonathan Ornstein. For more information on the Web, visit: http://www.mesa-air.com .