This article from NYTimes.com has been sent to you by psa188@xxxxxxxxx /-------------------- advertisement -----------------------\ Explore more of Starbucks at Starbucks.com. http://www.starbucks.com/default.asp?ci=1015 \----------------------------------------------------------/ Mesa in $512 Million Deal for Rival Regional Airline October 7, 2003 By EDWARD WONG The Mesa Air Group said yesterday that it was offering to buy Atlantic Coast Airlines for $512 million in stock in a deal that would form the largest regional airline in the country. Mesa, which is based in Phoenix, said it would continue to fly to small and midsize cities for United Airlines and would halt Atlantic Coast's plans to create a low-cost airline. Mesa sent a letter yesterday to Kerry B. Skeen, the chairman and chief executive of Atlantic Coast, offering 0.9 share of Mesa stock for each share of Atlantic Coast. Mesa's shares closed at $12.55 on Friday and fell 99 cents yesterday, to $11.56. Atlantic Coast closed Friday at $9.02 and rose $2.03 yesterday, to $11.05. A statement by Atlantic Coast said the board was considering the offer. "While it undertakes this review," it said, "A.C.A. will continue with its current operations and with the implementation of its plans to operate as an independent airline." Mesa said the merger would create a company with $1.8 billion in annual revenue, 9,000 workers and 297 planes. Robert Ashcroft, an analyst at UBS Warburg, wrote in an investor's note that he thought Atlantic Coast's board would not accept the offer and that Mesa would shy away from a hostile takeover since that would be costly and could anger labor groups. Atlantic Coast said late in July that it was planning to end its agreement to run regional flights for United Airlines, a UAL Corporation unit, and start its own low-cost carrier. The share price of Atlantic Coast plummeted after that announcement, and analysts have been skeptical of the airline's chances of success in operating an independent carrier. But Atlantic Coast has been reluctant to affirm a contract with UAL since UAL filed for bankruptcy protection last December and began using that leverage to renegotiate terms of its contracts with virtually all its suppliers and partners. About 80 percent of Atlantic Coast's revenue comes from United. It also runs flights for Delta Air Lines. In addition, Mesa operates regional flights for United, which is its second-largest customer after America West Airlines. Mesa, which had $605 million in revenue for the fiscal year ended in September, operates in the West and Midwest; Atlantic Coast, based in Dulles, Va., runs flights mostly in the East. The two route structures complement each other. For Mesa, the acquisition would give it a chance to quickly add planes to its fleet without having to find new aircraft financing, which is difficult to obtain these days. Jonathan G. Ornstein, the chairman and chief executive of Mesa, said in a telephone interview that Mesa would not proceed with Atlantic Coast's plan to create a low-cost airline and would instead reaffirm a contract with United. "Both of these carriers have done very well in the past," Mr. Ornstein said. Referring to Atlantic Coast's partnership with United, he added, "We think the company's best option going forward is to re-establish these relationships." A spokesman for United, Jeff Green, said that his company was still in talks with Atlantic Coast to work out new contract terms, but that "there's no guarantee a deal will be reached with them." United has been working on contingency plans to continue regional service in the areas covered by Atlantic Coast should the deal fall through, Mr. Green added. Several analysts said Mesa's initiative for Atlantic Coast seemed like a good move. Raymond L. Neidl of Blaylock & Partners said that in light of Atlantic Coast's generally falling stock price, it was no surprise that an airline was trying to buy it. "For Mesa, it's a big plus for them in the long term, I would say, because of the opportunity to obtain these assets at an economical cost," Mr. Neidl said. "The risk is managing the growth in the long term." Susan Donofrio of Deutsche Bank wrote in a note to investors that "at first glance it appears to be a nice alternative to Atlantic Coast's current plans to transform into a low-fare airline as we are not convinced that this low-fare strategy would be successful, given the cost structure of flying regional aircraft." http://www.nytimes.com/2003/10/07/business/07AIR.html?ex=1066531896&ei=1&en=8684fcc6ec7d3178 --------------------------------- Get Home Delivery of The New York Times Newspaper. 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