Northwest grabs Midwest

TPG Capital will be the primary owner of Milwaukee-based Midwest Airlines. But Northwest also has a stake in the deal, both a strategic and financial one. The buyout blocks a Northwest's competitor, AirTran Airways, from scooping up Midwest and thereby grabbing a bigger share of the market in the Upper Midwest,Northwest's home turf.

Together, TPG and Northwest offered $17 per share in cash to acquire Midwest Air. That trumped AirTran's cash and stock bid of $16.27 per share.

Northwest says it will not have a role managing the Milwaukee-based carrier. Northwest will have no seat on Midwest's board.

But Northwest has not divulged its stake in the deal. Currently, the two airlines have a partnership to sell tickets on each others' flights. That will continue. And eventually, Northwest's role could expand.

"There also is contemplated the possibility that Northwest could acquire Midwest in the future, but that outcome is not certain and we do maintain a degree of flexibility and the extent to which any such agreements will be in place, they will be for a limited duration, at the expiration of which we would be free to sell to anybody," said TPG partner Rick Schifter during a conference call with reporters on Friday.

In a statement, Northwest says it has "the right, but not the obligation" to acquire TPG's stake in Midwest." Northwest goes on to say that it has "no current plans to exercise that right."

Schifter seemed to indicate that Northwest first approached TPG about the deal, but Northwest later said the investment banking firm Goldman Sachs brought them together.

TPG and Northwest's buyout of Midwest Air will require both regulatory and shareholder approval.

Burt Foer, president of the American Antitrust Institute, says on the regulatory side, the deal raises some red flags. He says, even though Northwest won't have a voice on Midwest's board, the Eagan-based carrier may have a grip on some less visible reins.

"Northwest will still be in a position, theoretically at least, to exercise some influence on how TPG manages Midwest. Or without exercising direct influence, just informally, TPG is going to want to satisfy an important contributor, a big company like Northwest. So there's the potential for some kind of subtle, very indirect influence," Foer said.

For says this more subtle kind of influence crops up increasingly often in private equity takeovers. And he says there really isn't a body of law that addresses this relatively new scenario where private equity firms like TPG might act as a kind of hub between two competing entities.

"I think a case like this, if it becomes a case, requires creative thinking about how we want to avoid potentials for coordination and collusion through the investment process, which is somewhat different from the old days where one company directly buys the other company. Here, it invests in someone larger who will be owning the other company. So there's a new step in the process. But we don't yet have a clear way to do this," he said.

Foer says he's less concerned about what might happen down the road if Northwest tries to acquire Midwest Airlines. He points out that further regulatory reviews would take place.

Airline analyst Ray Neidl of Calyon Securities doubts such a merger is even likely.

"Airline mergers, even a small merger with Midwest, does pose problems," he said. "And Northwest is in a very delicate situation with their unions, and Northwest doesn't need more problems integrating unions."

As it happens, Northwest recently reached a new agreement to address concerns of its pilots union and has requested talks with its flight attendants and ground workers to address their dissatisfaction. The labor groups agreed to hefty paycuts during Northwest's stint in bankruptcy.