AMR Mutes Takeover Risk With Record $4.1 Billion Cash Entering Bankruptcy
Filing for Chapter 11 with that much in cash and short-term investments strengthened the third-largest U.S. airline company’s control over its fate, unlike peers that restructured in the last decade, said James M. Higgins, an analyst at New York-based Ticonderoga Securities LLC.
“Anytime you have your hand out to someone else for something, you lose some power,” Higgins said in an interview. “By doing it this way and by doing it now, they are going to retain more power over the process.”
Companies in Chapter 11 protection usually need so-called debtor-in-possession financing from sources that can force a sale or limit how the money is spent. Tapping that funding would weaken AMR against an acquirer such as US Airways Group Inc. (LCC), which tried to buy Delta Air Lines Inc. (DAL) in bankruptcy in 2006, said Hunter Keay, a Wolfe Trahan & Co. analyst in New York.
Banks representing bondholders and American’s three largest unions were named today to the committee of unsecured creditors in AMR’s bankruptcy case. The next bankruptcy hearing is set for Dec. 13.
AMR expects to have enough cash to fund operations during its entire time in bankruptcy, and outside financing is “neither considered necessary nor anticipated,” according to a statement after the Fort Worth, Texas-based company sought court protection on Nov. 29.
Cash and short-term investments under the Chapter 11 filing were more than twice the $1.5 billion for Delta and Northwest Airlines Corp. when they sought court protection in 2005. US Airways Group had $1.45 billion in 2004, and United Airlines (UAL) parent UAL Corp. had $800 million in 2002.
AMR’s total also was about 17 percent of trailing 12-month revenue, compared with 10 percent to 13 percent for other U.S. airlines when they filed bankruptcy, Keay and Philip Baggaley, a Standard & Poor’s debt analyst in New York, said in interviews.
US Airways, the fifth-largest U.S. airline, has been cited by analysts as the most likely suitor for AMR, and the Tempe, Arizona-based company’s shares surged 20 percent in the week that ended Dec. 2, the biggest such gain since May 28, 2010. A spokesman, Todd Lehmacher, declined to comment.
“Speculation on any possible mergers under our Chapter 11 reorganization are just that,” said Sean Collins, an American spokesman. “We have no comment on such speculation.”
‘Anything Can Happen’
“Anything can happen,” Horton said of a possible takeover attempt. “It’s impossible to speculate. Our objective is to be laser focused on changes we need to make to make this company successful for the long term.”
US Airways is the product of a 2005 merger of America West Holdings Corp. and the old US Airways when that carrier was in Chapter 11. American sat out the industry consolidation that saw Delta buy Northwest in 2008 once those carriers left bankruptcy, and United merge with Continental Airlines Inc. in 2010.
The threat of an attempted takeover would rise if AMR seeks DIP financing because the lender could “dictate what is happening,” said Wolfe Trahan’s Keay. He sees even odds on whether American will need such financing during its time in court protection.
“AMR’s management has turned aside such speculation in the past,” S&P’s Baggaley said in a Dec. 2 report. “If AMR can control its own fate in this regard, we do not see bankruptcy changing its view.”
AMR will trim first-half 2012 seating capacity, including a 2 percent reduction in January, Daniel McKenzie, a Rodman & Renshaw analyst in Chicago, said yesterday in a report. The cuts, chiefly in Dallas, Chicago and Los Angeles, were loaded into American’s flight schedule over the weekend, McKenzie said.
Tim Smith, an American spokesman, said the steps were planned before AMR’s bankruptcy filing.
The airline’s likeliest sources for more cash in Chapter 11 would be companies with which it already has a relationship, said Will Randow, an analyst at Citigroup Inc. (C) in New York. American used about $1 billion cash in the third quarter and about $500 million since then, Randow said, making him skeptical of the airline’s assertions of having sufficient cash.
Citigroup, the credit-card partner for American’s AAdvantage loyalty program, would be “highly likely” to help with financing if AMR asks, Straebler said. New York-based Citigroup helped American raise $1 billion in 2009 through the advance purchase of frequent-flier miles.
A Citigroup spokeswoman, Danielle Romero-Apsilos, declined to comment. Citibank is AMR’s fourth-biggest secured creditor, owed $890.2 million by the company, according to bankruptcy documents.
AMR could use assets including flight slots and gates at certain U.S. airports, spare parts and engines, ground support equipment and its corporate headquarters as collateral, Straebler said.
The timing of the filing surprised analysts such as S&P’s Baggaley, who had said AMR’s cash consumption might force the company into Chapter 11 in 2012, not this year.
Israel Shaked, a professor at Boston University School of Management whose Michel-Shaked Group consulting firm advised Delta during its bankruptcy, said AMR “did the right thing” in going to court last week.
“Filing was very smart because they still sit on $4 billion in cash,” Shaked said. “Some other airlines waited way too long.”
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