Southwest put on deal sidelines; Felix likely to take bid; NCI stock falls on cash gain

By Cristal Cody

Tupelo, Miss., Aug. 14 - Southwest Airlines Co.'s loss in its attempt to grab Frontier Airlines Holdings, Inc. on the cheap from a bankruptcy auction likely will limit the airline's deal-making capabilities for some time, an analyst told Prospect News on Friday.

Also on Friday, a market source said that Felix Resources Co. Ltd. shareholders should approve the A$3.50 billion takeover offer from Yanzhou Coal Mining Co., eastern China's largest coal producer.

In other special situations, NCI Building Systems, Inc. said Friday that it reached an agreement to gain a $250 million investment from a fund managed by private equity firm Clayton, Dubilier & Rice, Inc. in exchange for a 72.00% stake in the company.

Meanwhile, stocks closed off on Friday after a two-day rally. The Dow Jones Industrial Average lost 76.79 points, or 0.82%, to close at 9,321.40.

The Standard & Poor's 500 index fell 8.64 points, or 0.85%, to 1,004.09, and the Nasdaq Composite index slipped 23.83 points, or 1.19%, to 1,985.52.

Republic gets low survival odds

Republic Airways Holdings, Inc. said in a statement that it won the bidding to purchase Frontier upon its emergence this autumn from bankruptcy for $108.75 million.

The auction was held as part of Frontier's April 2008 Chapter 11 bankruptcy filing.

The offer was accepted over Southwest Airlines' higher bid of more than $170 million because Southwest's offer would have required a labor agreement between unions Southwest Airlines Pilots Association and Frontier Airlines Pilots Association.

Frontier said in a statement that Republic also has received Hart-Scott-Rodino antirust clearance for the transaction.

Denver-based Republic, though, will have a hard time competing with Dallas-based Southwest in its home market of Denver and in Minneapolis, Vaughn Cordle, chief analyst at AirlinesForecasts, LLC, said Friday in an interview.

"Republic has bitten off more than they could chew already" with the recent acquisition of Midwest Airlines Inc. "and now Frontier," he said. "We make the case that Republic will ultimately fail in the marketplace because they are too tiny to survive the fare war that is definitely coming."

He notes that Southwest has grown from a near zero market share in the Denver market in 2006 to a 17.00% share in 2009.

For Southwest, its loss in the auction puts the airline at a growth disadvantage, Cordle said.

The loss of Frontier likely cost Southwest shareholders $1.30 billion to $1.50 billion, or $1.60 to $2.00 per share, based on the acquisition's valuation, he said.

"It is likely that the share price will fall towards $7.00 now that the Frontier acquisition has failed, which represents a 25% hit," he said.

"Without an acquisition, Southwest has no choice but to compete on price and depend on a war of attrition for its growth," Cordle said. "United [Air Lines Inc.] benefits in the longer term because a Republic-owned Frontier will be a much weaker competitor, with both a higher cost structure and lower sustainable growth."

Indianapolis-based Republic Airways owns Chautauqua Airlines, Midwest Airlines, Mokulele Airlines, Republic Airlines and Shuttle America.

Southwest Airlines serves 66 cities in 33 states. The company's growth is predicted to "shrink probably 6.00% this year, maybe even more since they lost this acquisition," Cordle said. "The only way to get that growth up fast is an acquisition. Frontier coming out of bankruptcy represented an opportunity at low cost. It's highly unlikely they'll do another acquisition given what we witnessed with the Frontier bid."

Southwest's stock closed down 16 cents, or 1.73%, at $9.08 on Friday.

Republic shares jumped 60 cents, or 10.00%, to close at $6.60.

East digs Down Under

Felix shares rose 4.14% to A$17.60 on Friday after the deal was announced a day earlier.

Yanzhou shares increased 2.31% to HK$12.40.

Shareholders are expected to accept Yanzhou's offer of A$18.00 a share for the Australian coal mining company. The stock has traded from A$4.81 to A$21.00 over the past year.

"The offer value is pitched at the high end of Felix's share price trading range since January 2007," the source said. "Felix had been trying to sell itself since July 2008, and we believe that a counter bid is unlikely at this stage."

The offer must be approved by Australia's Foreign Investment Review Board and treasurer.

"We do not expect FIRB to regard Felix's assets as strategic, and hence expect it to approve the transaction," the market source said. "Despite public and political concern over the sale of assets to the Chinese players, we do not expect this to affect the transaction in a significant way."

The deal is expected to close by December and includes a $33.33 million breakup fee.

NCI trades stake for cash

Shares of NCI closed down 10 cents, or 2.48%, at $3.94 on Friday. The company's stock has traded from $1.76 to $40.95 over the past year.

NCI said Friday in exchange for the $250 million investment from the Clayton, Dubilier & Rice Fund VIII, the fund will receive new convertible participating preferred shares.

The shares will initially be convertible into about 106.80 million shares of stock at the fund's option. The fund will receive a 72.00% stake in NCI on an as-converted, pro forma basis.

NCI said the investment will position the company for growth and help reduce debt by $323 million.

"As a result of this transaction, we will resolve our capital structure issues and gain the flexibility to ride out the current economic crisis and benefit from improved market conditions over the next several years," Norman C. Chambers, NCI's chairman, president and chief executive officer, said in a statement. "After many months of exploring a broad range of solutions, we are convinced the CD&R Fund's investment, while unfortunately very dilutive, is in the best interests of our shareholders."

NCI said the deal does not require shareholder approval but does require termination of the federal antitrust waiting period.

The transaction is expected to close by the end of the year.

The private equity firm, based in New York and London, plans to appoint directors to NCI's board and will make James G. Berges, a Clayton, Dubilier & Rice operating partner, a director and chairman of the executive committee.

The Houston-based metal commercial building supplier also said it expects to report a profitable third quarter on Sept. 9.

Mentioned in this article:

Felix Resources Ltd. Australia: FLX

NCI Building Systems, Inc. NYSE: NCS

Republic Airways Holdings, Inc. Nasdaq: RJET

Southwest Airlines Co. NYSE: LUV

Yanzhou Coal Mining Co. Hong Kong: 1171

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