LOS ANGELES , Jan. 6 /PRNewswire/ -- Riley Investment Management LLC released the following statement opposing Northwest Airlines' proposal for Mesaba Airlines, a subsidiary of MAIR Holdings, Inc. (Nasdaq: MAIR):
As a large shareholder of MAIR Holdings, Inc., the owner of Mesaba Airlines, Riley Investment Management LLC continues to believe that Northwest Airlines' proposed offer to acquire Mesaba Airlines in exchange for the allowance of Mesaba $145 million claim against Northwest is grossly inadequate considering we value the total value of the Mesaba estate to be in excess of $300 million (Mesaba's original claim amount plus +$100 million value of Mesaba's SAAB business). We will pursue all avenues to ensure that such a transaction is not consummated. Our contemplated actions may include any or all of the following: filing objections to the creditors' current motion requesting the termination of exclusivity period for filing a plan of reorganization, pursuing litigation against various parties to the transaction, offering our own competing plan of reorganization if exclusivity is terminated, or entering into discussion with MAIR Holdings or other regional carriers. Additionally, we have been in discussions with numerous other large shareholders who share our concerns and support our actions. Additionally, we would like to note that contrary to what has been stated in the press, Mesaba Airlines has not agreed to any terms of the Northwest agreement. We believe this would require board approval at Mesaba as well as board approval at MAIR, neither of which has occurred.
We believe that Northwest Airlines has destroyed value for MAIR shareholders, Mesaba and Mesaba's employees, enabling Northwest to buy Mesaba below fair market value and avoid fairly paying Mesaba's valid claims in the Northwest bankruptcy. MAIR and Mesaba management have been unfairly criticized by its unions and the press for actions we believe were forced by Northwest. Northwest's bankruptcy filing and request for new RFPs for additional flying forced Mesaba to subject its employees to new labor contracts so that Mesaba could make attractive proposals to Northwest to continue to fly aircraft. Northwest is now attempting to purchase Mesaba and use this low cost structure as a vehicle to continue and buildup Northwest's regional business with all future value only going to Northwest Airlines. Below is a timeline of events related to the Mesaba bankruptcy and Northwest Airlines.
* Prior to Mesaba bankruptcy filing: Mesaba operates a fleet of
63 SAAB-340 and 35 Avro-Regional Jet aircraft for NWA. Trailing twelve
month revenue at Mesaba through 9/30/2005 was $416MM.
* August 29, 2005: Northwest signs a new ASA with Mesaba in which MAIR
is required to invest $31.7 million into Mesaba. Under the terms,
Mesaba would operate 35 AVRO and up to 15 CRJ-200/440 aircraft along
with all of the existing 63 SAAB aircraft under a 10-year contract.
* September 9, 2005: Bryan Ebensteiner, NWA Director of Airlink Planning,
sends an email to MAIR inquiring whether MAIR had made the required
$31.7 payment to Mesaba; Mesaba advises NWA that it had made the
payment.
* September 12, 2005: After it is ensured that liquidity had been
provided to Mesaba from MAIR, Northwest fails to make its regular
semi-monthly payment to Mesaba of $18.5 million for the second half of
August.
* September 14, 2005: Northwest files for bankruptcy. We find it hard
to imagine that Northwest management did not know that it was
contemplating filing for bankruptcy two weeks prior when it signed a
new ASA with Mesaba. Shares of MAIR drop from $9.50/share to
$4.50/share costing MAIR shareholders $100 million in value. A few
days after Northwest files for bankruptcy, Doug Steenland, CEO of
Northwest, resigned from the board of directors of MAIR.
* September 26, 2005: Northwest failed to make the full semi-annual
payment to Mesaba for the first half of September, reducing the payment
to $1.9 million. Total missed payments are approximately
$36.4 million.
* August 16, 2006: Mesaba files a $250 million claim against Northwest
Airlines which does not include the value of its current SAAB business
which we value at an additional +$100 million (our analysis is set
forth below).
* November 27, 2006: After Northwest's bankruptcy filing, Mesaba was
forced to seek labor concession with its unions in order to continue
operations and ensure continued and future business with Northwest.
Labor currently has a $22.7 million claim against Mesaba for contract
concession.
* December 20, 2006: Northwest offers Mesaba a $145 million claim in
total to purchase the entire company. In all we value the offer at 63%
of the value of Mesaba prior to filing for bankruptcy, which ignores
incremental value which would have accrued to Mesaba since under the
new ASA, where it had rights to operate the next 35 CRJ aircraft in
Northwest's regional fleet.
* December 22, 2006: Northwest settles with Pinnacle Airlines for a
$377.5 million claim and awards Pinnacle a new ASA that allows it to
continue flying for Northwest as a standalone public entity. Terms of
the new ASA allow Pinnacle to continue to operate all of its existing
124 CRJ-200/440 aircraft plus up to an additional 17 CRJ-200/440
aircraft for 10 years. 15 of these CRJ's were originally promised to
Mesaba when they signed their ASA. In all we estimate the value
Pinnacle's award to be worth $530 million, which is approximately 135%
of the estimated value of its prior contract (our analysis is set forth
below).
In light of the items mentioned above, 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's at a huge discount to its fair value. At best, Northwest and its executives ignored clear conflict of interest issues (Northwest owns 28% of MAIR and a director of Northwest also sat on MAIR's board) and at worst, fraud occurred. 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. To be clear, we are not opposed to Northwest acquiring Mesaba, as we believe all parties including employees, creditors, customers and shareholders can be made whole under appropriate terms. But we are strongly opposed to the offer of $145 million . In light of this, we will continue to pursue any and all strategies that will maximize value for shareholders of MAIR.
Valuation of Mesaba
Base Case Current Proposal
$MM
Est. 12/31/06 Net Cash at Mesaba 10.5
Claims against NWA by Mesaba
Pre-petition missed payments by NWA 36.4
Mesaba bankruptcy expenses 24.3
+ 1.5MM/mo (8/16/06 - 12/31/06) 6.8
Costs incurred in anticipation of CRJ deliveries 10.3
NWA breach (less than 90 days notice for
9 AVRO's removed) 5.3
SAAB Lease obligation owed to PNCL (11 SAABs) 15.6
SAAB engine lease obligations (GS & BofA) 17.4
Hangar Lease obligation 13.6
Total 'Valid' Administrative Claims against NWA 129.8 145.0
Est. Value of 49 SAAB Contract
(original ASA terms) 107.6
Est. Value of 15 CRJ-200 Contract
(original ASA terms) 52.5
Total Mesaba Value + Claims 300.4 145.0
Future Value Lost If CRJ-705's were Awarded
to Mesaba
Potential Value of CRJ-705 Contract
(new ASA terms) 88.5
Total Value + Potential 36 CRJ-705 Contract 388.9 145.0
Northwest Offer to MAIR versus Pinnacle
PNCL Original Deal New ASA
based on 1st9mo'06
Claim Award 377.5
Discount (17 add'l CRJ-200s) (42.5)
Fleet (CRJ-200s) 124 141
Annual Revenue 819.5 595.1
Target Margin 10% 8%
Oper Income Target 82.0 47.6
Business Value @ 5.3 Times 434.3 252.3
Net Value 434.3 587.3
% of Original Value 135%
MAIR Original Deal Proposed Deal Comparable
Prior to NWA Bk Deal Buyout
Claim Award 145.0 309.6
Fleet (63SAABs+35CRJ-200s) 98
Annual Revenue 432.0
Target Margin 10%
Oper Income Target 43.2
Business Value @ 5.3 Times 229.0
Net Value 229.0 145.0 309.6
% of Original Value 63% 135%
SOURCE Riley Investment Management LLC
