Shareholders of Mesaba Airlines parent MAIR Holdings last month accused Northwest Airlines of a conspiracy to suppress the value of its regional affiliate in preparation for a planned buyout. But whether or not Riley Investment Management and Thales Fund Management stood in a position to squash the proposed deal remained unclear, as Northwest and the Mesaba Airlines creditors’ committee appeared ready to proceed with or without their approval.
The deal would grant MAIR an unsecured $145 million claim in Mesaba’s bankruptcy and $10 million in cash to allow the regional airline to continue day-to-day operations. Riley, a holder of 5.2 percent of MAIR stock, called the offer “grossly inadequate” and placed the true value of Mesaba at closer to $300 million.
Nevertheless, Mesaba’s creditors’ committee appears eager to proceed, asking a judge for permission to file its own reorganization plan for Mesaba if the airline
didn’t do so by Northwest’s January 15 deadline. Riley and Thales, meanwhile, appear willing to take their fight to the courts if Northwest, itself a 28-percent shareholder in MAIR, does not adjust its offer to reflect what they consider a fair price. The judges overseeing the bankruptcy cases of both Northwest and Mesaba would have to approve any deal.
“We will pursue all avenues to ensure that such a transaction is not consummated,” said Riley in a statement. “…we believe that not only is Northwest Airlines not offering fair value for Mesaba, it also pursued a strategy of destroying value in order to purchase Mesaba at a huge discount to its fair value. At best, Northwest and its executives ignored clear conflict of interest issues [Northwest owns 28 percent of MAIR and a director of Northwest also sat on MAIR’s board] and at worst, fraud occurred.”
Before it filed for bankruptcy in 2005, Mesaba flew a fleet of 63 Saab 340 turboprops and 35 Avro RJs as Northwest Airlink. On August 29 of that year, Northwest and Mesaba signed a new service agreement that required MAIR to invest $31.7 million in Mesaba. Under the terms of the 10-year contract, Mesaba would continue to fly its existing fleet and add up to 15 Bombardier CRJs. Some two weeks later, after MAIR transferred the $31.7 million to Mesaba, Northwest defaulted on an $18.5 million service contract payment to Mesaba and filed for bankruptcy. By the end of September missed payments had reached some $36.4 million.
Days later Northwest said it would halt delivery of 13 CRJs scheduled for delivery into last year and ground 10 Saab 340s. Forced to declare bankruptcy itself, Mesaba could do nothing but watch Northwest purge it of its entire Avro fleet, leaving it with less than half its peak seating capacity. After Northwest issued requests for proposals to competing airlines to perform Northwest Airlink flying, Mesaba spent the next year in negotiations with its three unionized employee groups until, under threat of liquidation, it won concessions worth 15.8 percent of its payroll costs. As part of the deal, the labor unions won a $22.7 million claim in Mesaba’s bankruptcy reorganization.
“Under the proposed transaction, Northwest stands to reap the entire economic benefit of Mesaba’s labor concessions with cheaper flying costs for Northwest going forward, but only after Mesaba and therefore MAIR shareholders pay for the $22.7 million claim owed to Mesaba’s labor unions,” said Riley.
Notwithstanding Riley’s protestations, Northwest said the creditors’ committee and Mesaba have already approved the deal and last month MAIR Holdings released a statement confirming it had reached an agreement in principle to accept the offer. However, in an objection filed in Mesaba’s bankruptcy case, Riley and Thales asserted that Minnesota law requires a shareholder vote in transactions as significant as this one.