Published February 14, 2013
NEW YORK – After sitting out the industry's last round of mega-mergers, airline giants AMR Corp , parent of American Airlines, and US Airways Group are finally tying the knot. Meet the matchmakers: the financial and legal advisers for AMR's unsecured creditors' committee in bankruptcy.
Jack Butler, the Skadden lawyer representing the creditor panel in AMR's Chapter 11 bankruptcy case, joined forces with investment bankers Gregg Polle and Bill Derrough from Moelis & Co to make sure AMR management - which was not exactly keen on a merger during the case - would give consolidation a fair shake.
The trio of advisers also served as the go-between whenever the two carriers wouldn't budge at critical junctures of negotiations, pitching compromise solutions that would work for both sides.
When AMR's three largest unions publicly announced their support for a merger with US Airways on April 20, the smaller rival also sent its first formal merger proposal to AMR and its creditors, people familiar with the matter said.
That undisclosed initial offer, which proposed AMR creditors and US Airways each own roughly half of the combined company, fell short of the eventual merger terms announced on Thursday and was largely ignored at the time, the people said. They did not want to be named because they were not authorized to speak to the press.
Under the $11 billion all-stock deal now approved by both companies' boards, AMR creditors are taking 72 percent of ownership in the merged company and US Airways shareholders the rest.. AMR shareholders, once assumed out of the money, will get 3.5 percent of the reorganized stock, which could amount to between $350 million and $400 million, Butler said at a court hearing on Thursday.
ALL ABOUT TRUST
Hostile takeover bids rarely succeed in bankruptcy. US Airways chief Doug Parker knows that first-hand from US Airways' failed hostile bid for Delta Air Lines in 2007.
But a consensual deal with AMR would require a level of trust that was not readily apparent early in the case.
When the creditors' committee tapped its advisers late in 2011, they were taking on a set of well-known dealmakers. Butler had led the restructurings of several major companies, including auto parts maker Delphi Corp and US Airways in its first restructuring. Derrough had represented bondholders in Delta's bankruptcy, in which US Airways had made an unsuccessful takeover bid. Polle, then head of mergers & acquisitions at Citigroup, advised US Airways in the Delta case.
That familiarity would become crucial in building trust with the parties as merger talks wound on.
The prospect of a merger with US Airways was apparent from the get-go, and Skadden and Moelis were in communication with US Airways from the early stages of the case, according to people close to the matter. But AMR began to grow distrustful of the committee when it felt the committee was taking too active a role in pushing US Airways to engage in merger talks, the people said.
For their part, the committee's advisers felt AMR, despite verbal commitments to explore a merger, would not take the matter seriously unless pushed, the people said.
To break the stalemate, Derrough, Moelis' global co-head of restructuring, suggested the committee and AMR negotiate a written formal framework for evaluating mergers. AMR was lukewarm at first, and arguments between the sides came to a head in early May, when a high-ranking AMR officer and a committee adviser conceded that each was losing trust in the other, the people said.
But that spat, which could have been seen as a dangerously low point in the case, ultimately proved key in the sides hammering out a deal: without inherent trust, the parties realized a formal framework was necessary to ensure a cohesive exploration of AMR's restructuring options, the people said.
The framework, which came to be known as the "merger protocol," allowed the committee to be in the room for every discussion between US Airways and AMR. In return, the committee promised not to engage with US Airways without AMR's permission. The agreement was a crucial factor in convincing US Airways to compromise with AMR, one of the people said.
"US Air might not have kept going if it believed it was only negotiating with American," one of the people said. "There were literally hundreds of phone calls over a two- or three-month period, and the committee was there to chaperone, basically."
US Airways' familiarity with Derrough and Polle may have also convinced them to bargain with AMR, one of the people said.
"The committee was trying to get them to trust the process, and I'm not sure they would have agreed to if there wasn't familiarity," one of the people said.
That's not to say the negotiations were a love fest. But, while the sides continued to disagree on terms, the creditors' committee, led by Butler, maintained a united front in court.
As savvy in the art of presentation as he was at making deals, Butler was tight-lipped with media throughout AMR's bankruptcy, his willingness to talk off-the-cuff a rarity. When he made public statements, they were usually prepared, concise and eloquent, and largely supportive of AMR's efforts to control its own fate in Chapter 11. In a case not without hostility behind the scenes, the committee never made a formal effort to wrest control from AMR's hands by seeking to terminate the company's exclusive right to file its own restructuring plan.
GETTING OFF THE GROUND
Once the merger evaluation process gathered momentum in the late summer, the advisers to the creditors committee got even more heavily involved.
US Airways and American initially were miles apart on how to analyze potential merger benefits, requiring the creditors to jump in to help find common ground.
The creditor advisers, for example, came up with an independent analysis forecasting around $3.5 billion in total net savings and benefits from a merger, taking into account integration expenses.
That figure came in between a lower projection by AMR and a higher one by US Airways, and was eventually agreed by all parties in November. The agreement cleared a key obstacle that allowed talks to move into their final stages.
Perhaps the most notable effort by Skadden and Moelis had nothing to do with dollars and cents. With a merger inevitable, a lingering question was who would run the new firm - Parker, or AMR Chief Executive Tom Horton. Both men wanted the job.
At a dinner in late January with AMR board member Judith Rodin, lead independent director Armando M. Codina, and bankruptcy lawyer Tom Roberts, the creditor advisers said they supported US Airways' Doug Parker as chief executive of the combined airline, according to people close to the matter. They added, however, that they saw an important role for Horton as chairman during the transitional period, and that making Horton chairman for a limited time was instrumental to getting the deal done.
The committee said the same thing to Parker in a Jan. 31 call. It also played a key role in negotiating Horton's compensation package, suggesting a cash-and-equity deal that Horton quickly accepted, said a person close to the matter.
The following weekend, Parker reached out to Codina and Horton, moving from his initial posturing to become both chairman and CEO. The trio personally hammered out final economic terms and the roles for each of them in the new company.
That was the moment when all stakeholders knew the merger, at long last, was cleared for takeoff.