Sept. 21 (Bloomberg) -- Appaloosa Management LP has positioned itself to benefit from a possible merger between bankrupt AMR Corp. and US Airways Group Inc. after taking stakes in both airlines, three people familiar with the matter said.
While the hedge fund run by David Tepper isn’t lobbying for a tie-up, it favors consolidation and may opt later to push for a deal, said one of the people, who asked not to be identified because the matter is private. Appaloosa is US Airways’ top shareholder and has amassed AMR debt that could be converted to equity in a Chapter 11 restructuring, court records show.
Owning US Airways stock and AMR debt gives the $15 billion investment firm an opening to sway both sides of a potential combination that would form the world’s largest airline. AMR dismissed the idea of a merger for months before agreeing in May to weigh options besides its stand-alone bankruptcy-exit plan.
With a strategy like Appaloosa’s “you either insure you win or that you don’t lose by being on both sides of a deal,” Fred Lowrance, an Avondale Partners LLC analyst in Nashville, Tennessee, said today in an interview. “No matter the outcome it’s going to be positive for one of them.”
The stakes are part of Appaloosa’s bet on an industry rebound as consumer spending recovers and fuel costs drop, one of the people said. Its holdings as of June 30 included stock in United Continental Holdings Inc. and Delta Air Lines Inc., the only U.S. carriers bigger than AMR’s American Airlines.
Appaloosa has supported airline mergers because past combinations have boosted shares, the person said. The firm has shared that view in discussions with executives at Tempe, Arizona-based US Airways and with others, the person said.
US Airways Chief Executive Officer Doug Parker began pressing for a merger in January, while Fort Worth, Texas-based AMR has resisted. AMR holds the exclusive right to offer a reorganization plan through year-end, so US Airways hasn’t made a formal bid.
US Airways declined to comment on Appaloosa, said Ed Stewart, a spokesman. Mike Trevino, an AMR spokesman, said the airline doesn’t discuss “the actions of investors.” Two calls to Appaloosa for comment this week weren’t returned.
Merger speculation has helped Short Hills, New Jersey-based Appaloosa and other investors in US Airways stock and AMR debt. US Airways, the fifth-biggest U.S. airline, has more than doubled this year. The shares slipped 0.1 percent to $10.67 at the close in New York as most U.S. carriers declined.
AMR’s $460 million of 6.25 percent convertible notes due October 2014 traded at 67.75 cents on the dollar at 2:14 p.m. New York time, compared with 17.75 cents after the airline’s Nov. 29 bankruptcy filing, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Appaloosa has “identified this as probably the last major round of airline consolidation,” said Avondale’s Lowrance, who has a market outperform rating on US Airways. “They know airlines well, and want to be a part of it.”
The firm has looked to a bankrupt company for returns before. Appaloosa agreed to buy the former Delphi Corp. out of court protection before backing out of a $2.55 billion agreement in 2008, saying the auto-parts supplier failed to meet terms of their accord. Delphi later sued Appaloosa and the parties reached an undisclosed settlement.
Appaloosa added 2.27 million US Airways shares as of June 30, filings show, raising its ownership to 12.9 million shares, or about 8 percent. Appaloosa also bought claims at AMR from Citigroup Inc. tied to aircraft leases, bankruptcy documents show. The hedge fund holds additional AMR debt the firm isn’t required to disclose and is one of the larger debt holders, the people familiar with the matter said.
Besides AMR and US Airways, Appaloosa also owned at least 2.9 percent of United, 1.1 percent of Delta and 0.3 percent of JetBlue Airways Corp., according to regulatory filings as of June 30.
Other US Airways shareholders also have bought AMR debt.
Marathon Asset Management LP, US Airways’ fifth-largest equity investor, owns special facilities revenue bonds issued to finance AMR’s acquisition, construction and improvement of airport facilities, court papers show.
Cyrus Capital Partners LP, another US Airways shareholder, owns AMR debt as well. Cyrus is among a group of 12 creditors that is negotiating with AMR about potential financing for its bankruptcy restructuring. Cyrus’s holdings include $37.9 million of the 6.25 percent notes and $71.6 million of 7.5 percent notes due in March 2016, court papers show.
AMR debt holders began organizing at least as far back as May into groups outside its unsecured creditors committee to determine whether the bankrupt carrier or US Airways would offer the best return. Joining such ad hoc groups gives the unsecured debt holders more leverage since they aren’t part of the panel created by the bankruptcy court to represent all AMR creditors.
Last month, an AMR creditor group including JPMorgan Chase & Co., Claren Road Asset Management LLC, Pentwater Capital Management LP and King Street Capital Management LP said it was interested in providing financing for the company’s restructuring.
Some individual bondholders have met with US Airways to review their plan for a merged carrier, and one ad hoc group in June agreed with AMR CEO Tom Horton’s request that they study his stand-alone plan before reviewing US Airways’ merger proposal, people familiar with the matter said at that time.
While Horton initially said he wanted the airline to leave bankruptcy independently and then consider mergers, he later agreed to consider potential tie-ups while under court protection. AMR in July sent agreements for an exchange of confidential financial and operational data to US Airways and other potential partners it didn’t name publicly.
Parker has said US Airways is the only partner that can solve AMR’s network weaknesses, including boosting market share along the U.S. East Coast and Midwest and adding hub airports that would connect passengers to more cities across the country.
The case is In re AMR Corp., 11-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
To contact the reporters on this story: Beth Jinks in New York at firstname.lastname@example.org; Mary Schlangenstein in Dallas at email@example.com; David McLaughlin in New York at firstname.lastname@example.org