With a cash infusion of more than $60 million, could a major acquisition be in Republic Airways Holdings' [RJET] future, or will it just buy more airplanes?

The parent of Chautauqua Airlines on Jan. 13 filed preliminary paperwork to sell 5 million additional shares of stock to raise more working capital. The company estimates that the stock sale could generate more than $62 million in new capital. The Indianapolis-based company went public last June, which netted $58.2 million. A date has not been set for the latest stock sale.

The registration anticipates a stock sale at $13.29 a share; however, since the sale was announced, the company's stock price has been sliding. It dipped as low as $10.50 a share in trading immediately after the announcement. It has been recovering since that low. Merrill Lynch is underwriting the offering and may sell an additional 750,000 shares if demand warrants it.

In its filing with the U.S. Securities and Exchange Commission, Republic said the proceeds would be used for "general corporate purposes, including working capital, potential strategic acquisitions and the possible acquisition of additional aircraft." SEC regulations prevent Republic from discussing the proposed offering.

On Jan. 19, Embraer [ERJ] announced that Republic has placed a firm order for 16 additional Embraer 170s to be used for Delta Air Lines [DAL]. The deal also includes the option to purchase 34 more 170s. The latest deal hikes Republic's firm orders for the 170 to 39 with 61 options. Delta, Republic and Embraer announced in late December that the deal was pending.

The list price for the 16 new jets is $400 million and if all the new options were exercised the deal would be worth $1.5 billion.

According to the registration document, Republic has financing lined up for 24 of the next 28 Embraer 170s to be delivered. As of Sept. 30, Republic has future lease obligations in excess of $810 million.

As of Sept. 30, Republic owned 49 planes and leased 47. The fleet had grown to 111 by Dec. 31. By the end of the year, Republic anticipates it will have 98 ERJ 145s and 31 Embraer 170s.

Republic anticipates that with its cash balance, operating receipts and the stock sale proceeds, it will be able to meet is capital expenditure requirements for at least the next 12 months. After the stock sale, Republic's cash balance will be $112 million.

Republic has not released its 2004 financial report. In the first nine months, it earned $29.7 million on revenue of $375.6 million.

Calyon Securities analyst Ray Neidl has suggested that either Republic or Mesa Air Group [MESA] may try to buy Flyi [FLYI], the parent of Independence Air. "While Republic's planned stock offering does not involve any such deal," Neidl said, "it does not preclude a possible transaction." A deal for Flyi outside of the bankruptcy court would have a long-term benefit for Republic, he noted.

The offering could give Republic the edge should Mesa also seek Flyi, according to one industry observer who asked not to be name. Mesa, he noted, does not have the balance sheet to pull off an acquisition without outside assistance.

The stock sale will enable Republic to be "opportunistic," Neidl said, as the regional airline industry undergoes a major restructuring and consolidation in the next few years.

[A week later Neidl backpedaled on the prospects of Republic buying Flyi. GE Capital Aviation Services (GECAS) is providing a $19.5 million load to Flyi as Independence returns up to 20 RJs over the next six months and restructures the leases on the rest of the RJ fleet. The deal, Neidl said, extends Independence's life for at least several more months.

["We are no longer confident that a deal with other regionals carriers is imminent. We now have doubts that this will occur in the immediate term," he said.

[In Republic's case, the two carriers fly different aircraft types which would require Republic to buy Flyi's flight certificate or undertake extensive recertification.]

Part of the mission of a stock registration document is to disclose any pitfalls that could potentially harm an investor. Some of Republic's fine print includes these cautionary warnings:

• In order to remain in compliance with its code-share contract with American Airlines [AMR], Republic Airways is attempting to create a second carrier, Republic Airlines, to fly the Embraer 170. The scope clause in American's pilot contract limits the number of 70-seat planes an American Connection partner can fly. Republic has agreed to pay American $500,000 if the new carrier is not certified by Feb. 19. The payment increases to $1.1 million per month if Republic Airlines is not operating the Embraer 170 by April 22. The carrier also promised American that Chautauqua would fly no more than 18 Embraer 170s. "If Republic Airlines does not receive its required certification by the end of June, our financial condition, results of operations and the price of the common stock could be materially adversely affected," according to the registration document.
• Since entering bankruptcy a second time, US Airways [UAIRQ] has not accepted the current code-share contract with Republic. As a result, the mainline carrier could seek to negotiate new terms less favorable to Republic. If US Airways terminates the contract, Republic would still be responsible for the lease payments on the aircraft currently used for US Airways Express.
• WexAir, a unit of Wexford Capital, will still retain 63.2 percent of all outstanding Republic shares. Wexford currently holds 75.5 percent and it controls the company's board.
• For the first nine-months of 2004, US Airways accounted for 43 percent of Republic's revenues, Delta generated 35 percent, American Airlines accounted for 19 percent and United Airlines [UALAQ] just 3 percent.

>>Contacts: Ray Neidl, Calyon, (212) 261-4057<<