TPG Capital Unloads Midwest
After a roughly year-and-a-half holding period, the firm exits the investment for just $6 million in cash and a $25 million convertible note.
June 24, 2009
When TPG Capital acquired Milwaukee’s Midwest Airlines for $450 million, it was expected that the firm would be able to emulate its storied Continental Airlines buyout, a 1993 deal that helped cement David Bonderman’s reputation and achieved a 55% internal rate of return in the process. The current climate, however, proved too difficult to overcome, as TPG exited Midwest through a $31 million sale to Republic Airways Holdings.
Through the deal, Republic will acquire 100% of Midwest’s equity, in addition to TPG’s $31 million secured note from Midwest. Republic is paying just $6 million in cash and a $25 million, five-year note, convertible to Republic stock at $10 a share. Shares of Republic jumped on the news, and were trading at $6.87 a share in early morning trading Wednesday. TPG will have the right to nominate a member to Republic’s board of directors.
For Republic, the deal comes just one day after the company committed $108.75 million to buy Frontier Airlines out of bankruptcy, a transaction that is still subject to court approval and various conditions.
TPG originally partnered with Northwest Airlines when it acquired Midwest, with Northwest contributing $213 million for a 47% stake. The pair had dueled hostile bidder AirTran Holdings, which originally bid $11.25 a share to acquire the public company in late 2006. AirTrain upped its offer multiple times and eventually won three seats on the board through a proxy contest. But almost a year after its original proposal, AirTran lost out when TPG and Northwest submitted a $17-per-share, all cash, bid at the end of 2007.
The deal was notable at the time, because it underscored that private equity firms could be flexible in the absence of debt. TPG also structured the transaction with a distribution waterfall that gave the firm first-out money.
TPG Capital declined to comment for this story, while a Delta representative noted that Northwest had already written the investment down to zero ahead of its merger with Delta.
Outside of TPG’s Continental investment, the airlines space has proven difficult for private equity investors. Golden Gate Capital, Maveron and Sutter Hill Ventures, for instance, backed defunct Eos Airlines, an all-business-class carrier that shut down last year. Just a month before Eos was shuttered, the Yucaipa Cos.-backed Aloha Airlines was also liquidated in Chapter 7. A number of other regional carriers have also suffered, including ATA Airlines, Skybus and others, while the difficult conditions led larger names, such as Delta and Northwest to merge.
Through the Midwest acquisition, Republic will keep the carrier’s brand, but intends to replace Midwest’s Boeing 717s with Embraer 190 aircraft. Calls to Republic were not immediately returned by press time.
Analysts largely cheered Republic’s successive deals, although noted that the integration could prove difficult.
“Republic will have to deal with the costs of taking over the two airlines and restructuring the operations, but longer term, the transaction enables the airline to be more in control of its own destiny,” Helane Becker, a managing director at research firm Jesop & Lamont, wrote in a note to clients. “One of the biggest criticisms of the regional airline industry is [that it] is at the mercy of their major airline partners.”
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