Wednesday, November 22, 2006

Northwest Airlines (NWACQ) Holder Says Stock Could Be Worth $19.75-$33.50, Wants Shareholder Committee

Bankrupt airline Northwest Airlines Corp. (OTC: NWACQ) is soaring today following a disclosure in a 13D filing from 5% holder Owl Creek Asset Management that describe possible scenarios whereby the stock could be worth between $19.75 and $33.50 per share and arguing in favor of forming a committee to represent shareholders.

The fund said, "Nevertheless, there is a growing and substantial likelihood that equity holders will receive a meaningful distribution in these cases. The Debtors have achieved cost savings with several labor groups and certain aircraft financiers as well as from industry-wide trends that are benefiting all airlines. These industry wide trends include a substantial decline in the cost of oil, potential consolidation of the industry through mergers, lower capacity, and an increased ability to maintain pricing."

Shares of Northwest Airlines are up 28% to $3.36 today. The stock has jumped from below $1 per share ($0.90) since 11/15 following news that US Airways Group (NYSE: LCC) made an $8 billion merger proposal for other bankrupt carrier Delta Air Lines, Inc. (OTC: DALRQ).

A Copy of the Letter:

Dear Diana: (Acting United States Trustee)

We represent Owl Creek Asset Management, L.P. ("OWL CREEK"). Owl Creekowns 4.4 million shares of common stock issued by Northwest Airlines Corp.("NORTHWEST"), the principal debtor in the above-referenced cases. For the reasons set forth below, Owl Creek requests the appointment of an OfficialNorthwest Equity Committee (the "NORTHWEST EQUITY COMMITTEE") to represent the currently unrepresented yet critical shareholder interests in the Northwestcases. Should you exercise your discretion to appoint the Northwest EquityCommittee, Owl Creek will serve if you select it and believes that, along withitself, there will be many other interested shareholders willing to work toprotect shareholders' legitimate economic interests in accordance with thistimely request.

As you know, little over a year ago, on September 14, 2005 (the"PETITION DATE"), Northwest and certain affiliates (collectively, the "DEBTORS")filed voluntary petitions for relief under chapter 11 of title 11 of the UnitedStates Code (the "BANKRUPTCY CODE").(1) The Debtors' cases proceed on a jointly administered basis in the United States BankruptcyCourt for the Southern District of New York before the Honorable Allan L.Gropper (the "COURT"). On September 30, 2005, you appointed the OfficialCommittee of Unsecured Creditors (the "OFFICIAL CREDITORS COMMITTEE") torepresent the interests of the Debtors' unsecured creditors. In addition to itscreditors' claims, however, Northwest has outstanding over 87.3 MILLION sharesof common stock and approximately 4.7 MILLION shares of preferred stock that arecurrently unrepresented in Debtors' bankruptcy cases. In terms of equityholders, over 37,000 separate registered record holders hold Northwest's equitysecurities.(2) As you know, with approximately 37,000 record holders, the numberof actual beneficial holders is much higher and may number in the hundreds ofthousands if not more. As in many bankruptcy cases where, as here, it ispossible (if not likely) that there will be a meaningful equity recovery,Northwest's equity securities continue to trade actively in the"over-the-counter" market at substantial valuations.

Owl Creek submits that appointment of a representative NorthwestEquity Committee is both appropriate and necessary here. In fact the Debtors'cases present, we believe, each criterion upon which your office and the courtsrely when appointing equity committees:

(a) the Debtors' cases are large and complex;

(b) the Northwest stock is widely held and actively traded;

(c) the interests of Northwest's shareholders are not otherwise adequately represented;

(d) the Debtors do not, under reasonable (non-strategic) valuations, appear to be "hopelessly" insolvent;

(e) Owl Creek's request is appropriately timed based on the status of the Debtors' cases; and

(f) the necessary costs do not significantly outweigh the concerns for adequate representation.

SEE, E.G., IN RE JOHNS-MANVILLE CORP., 68 B.R. 155, 159-60 (S.D.N.Y. 1986); INRE BEKER INDUS., 55 B.R. 945, 950 (Bankr. S.D.N.Y. 1985) (equity committeeappointed); IN RE WANG LABS., INC., 149 B.R. 1, 2 (Bankr. D. Mass. 1992)(appointing an equity committee over objections of the United States Trustee andthe official creditors committee even while debtor had negative book value ofseveral hundred million dollars); IN RE DELPHI CORP., Oral Opinion, Case No.05-44481 (RDD) (Bankr. S.D.N.Y. Mar. 22, 2006) (Hearing Transcript Mar. 22, 2006at pp. 160-161) (appointing equity committee over the objections of the UnitedStates Trustee, the debtors and the official creditors' committee where "it is undisputed that on abalance-sheet basis [that the debtors have a] roughly 6.3 billion dollar hole,or insolvency").

THE NORTHWEST BANKRUPTCY CASES ARE LARGE AND COMPLEX. These casesinvolve BILLIONS of dollars of assets and liabilities. There are severalcreditor constituencies. In addition to the Official Creditors Committee thatyou appointed, the Court has appointed a separate official committee torepresent the interests of certain retirees (the "OFFICIAL RETIREES COMMITTEE"and, with the Official Creditors Committee, the "OFFICIAL COMMITTEES"). Thesecases involve collective bargaining agreements and bargaining units, massive andhighly leveraged equipment assets, significant commodity needs (fuel) subject tonational and international pressures, substantial competitive pressures withconsolidation trends among legacy carriers, and price competition from low-costcarriers. In terms of sheer size, the Northwest cases are among the largest. Interms of relevant issues, the Debtors' cases are among the most complex, with anumber of issues directly affecting the likely recovery to equity holders.

NORTHWEST'S STOCK IS WIDELY HELD. Over 37,000 record holders hold, foreven more beneficial owners, over 87.3 million shares of Northwest common stockand 4.7 million shares of Northwest preferred stock. Those numbers are enormousand meet and exceed court-tested concepts of "widely held" equity. In fact,courts have ordered the appointment of equity committees in other chapter 11cases where the number of shareholders was SIGNIFICANTLY less than here. SEE,E.G., IN RE BEKER INDUS. CORP., 55 B.R. at 947 (court directed the appointmentof an equity committee where common stock was held by 2,148 shareholders); IN REBALDWIN UNITED CORP., 45 B.R. 375, 376 (Bankr. S.D. Ohio 1983) (court directedthe appointment of an equity committee where common stock was held byapproximately 15,000 shareholders).

NORTHWEST'S STOCK IS ACTIVELY TRADED. Northwest's shares tradeactively in the "over-the-counter" market. Over the last several weeksNorthwest's average daily trading volume EXCEEDED 11 MILLION SHARES. AndNorthwest is no "penny stock." Yesterday, Northwest was trading at $2.20 per ashare, implying an EQUITY capitalization of close to $200 million; that is, ONTOP OF over $15 BILLION in debt. In fact, Northwest's common stock traded ashigh as $3.10 per a share over the past year, implying a valuation of over $270million. Northwest's trading volume and pricing indicates a market view thatequity is, or is likely to be, "in the money." As set forth further in thisletter below, Owl Creek believes that Northwest's reasonable valuation even atthis preliminary time, drawn from the values that the market ascribes toNorthwest's competitors and the value that the recent hostile offer for DeltaAirlines implies, could exceed a billion dollars. Owl Creek suggests that $200to $270 million in CURRENT market value or over $1 billion in POTENTIAL marketvalue, attributable to tens or hundreds of thousands of equity holders,demonstrates an interest worthy of dedicated fiduciary protection.

NORTHWEST'S SHAREHOLDER INTERESTS ARE NOT ADEQUATELY REPRESENTED.Outside of bankruptcy, Northwest's board may singularly focus on itsshareholders' interests. But inside bankruptcy, Northwest's board and itsofficers have broad-based fiduciary responsibilities to every interest party inthese cases, not principally to the public investors. SEE COMMODITY FUTURESTRADING COM. V. WEINTRAUB, 471 U.S. 343, 355 (1985). In practice, boards andofficers act for and react to the creditors, as they are more senior in thecapital structure and they have United States Trustee- and court- appointed representatives with whom the boardof directors must deal. For this reason, the Debtors' directors and officers aresubject to serious conflicting loyalties and are not advocates for the publicshareholders. In fact, here, as in many cases in which it later proves wrong,the board already has taken the strategic view that an equity recovery is"unlikely" (regardless of the contrary market view). Thus, those at leasttheoretically in a position to look out for equity have said that they do not.

Likewise, the Official Committees represent creditors and do notprotect shareholders' interests. In fact, just the opposite is true. OfficialCommittees advocate for recoveries AT THE EXPENSE of equity recoveries. Seminalcases such as NATIONAL GYPSUM, K-MART, and the recently confirmed MIRANT CORP.demonstrate that creditors committees advocate for value to creditors,regardless of shareholders' entitlement. MIRANT CORP. is a case in point. TheMIRANT debtors repeatedly admonished the MIRANT court that its equity was "outof the money." The two MIRANT creditors committees repeated this mantra andforcefully litigated to restrict the equity from any recovery. The Mirant courtappointed an equity committee, and, thereafter, the debtors and the twocreditors committees forced a valuation fight to render equity without arecovery. At the conclusion of a twenty-seven day valuation trial, the MIRANTcourt held that equity was well in the money and that the estate fiduciaries hadsought instead to transfer over $600 million to creditors. SEE MIRANT MemorandumOpinion, signed November 17, 2006 at pp. 18-19, 43. Here, as in MIRANT, only aNorthwest Equity Committee can fully and fairly represent Northwest'sshareholders in these cases.

EQUITY LIKELY WILL RECEIVE A MEANINGFUL DISTRIBUTION. Here, as inDELPHI CORP., Owl Creek seeks the appointment of the Northwest Equity Committee"early in the case, as opposed to at the time a plan is to be negotiated and/orlitigated at confirmation . . . [and] it is as a result, important . . . to givethe benefit of the doubt to the movants here." DELPHI CORP., March 22, 2006Hearing Transcript at pp. 166-167. Thus you should not require Owl Creek TOPROVE NOW that there is a substantial likelihood that equity holders willreceive a meaningful distribution. These cases have not reached the planconfirmation stage. Nevertheless, there IS a growing and substantial likelihoodthat equity holders will receive a meaningful distribution in these cases. TheDebtors have achieved cost savings with several labor groups and certainaircraft financiers as well as from industry-wide trends that are benefiting allairlines. These industry wide trends include a substantial decline in the costof oil, a consolidation of the industry through mergers, lower capacity, and anincreased ability to maintain pricing. In the past twelve weeks alone, tradingprices for the Northwest bonds have MORE THAN DOUBLED from the low forties tothe mid-eighties. Here, in fact, the active trading prices of the Northwestbonds are SIGNIFICANTLY higher than were the trading prices of bonds in othercases, such as DELPHI CORP., DANA CORP., and MIRANT CORP., when their equitycommittees were appointed. Northwest's bond prices support a view that equitywill recover. SEE IN RE WILLIAMS COMM. GROUP., 281 B.R. 216, 221 (Bankr.S.D.N.Y. 2002) (solvency appears likely when bonds are trading at close to facevalue).

NORTHWEST IS NOT "HOPELESSLY" INSOLVENT. Though it is early to valueNorthwest for recovery purposes, Owl Creek submits that, based on Wall Streetanalyst reports, the trading markets value Northwest's legacy carrier peers(American, Continental, United, and US Airways) at 5-1/2 to 6 times "EBITDAR."(3) Carriers like Northwest with a higherlikelihood of being a merger candidate trade for more than 6x EBITDAR andcarriers with a lower likelihood of being a merger candidate trade closer to5.5x EBITDAR. Based on similar 2007 fuel price assumptions to those underlyingthe comparable company valuations, Owl Creek forecasts Northwest's 2007 EBITDARto be $2,700,000,000. Given a valuation of 6.0x 2007 EBITDAR, Northwest shouldhave a total enterprise value of over $16,200,000,000 at the time of itsexpected emergence from bankruptcy protection in September of 2007. With a cashbuild up of over $1,000,000,000 during the remaining pendency of the bankruptcycases, this would result in an equity value of $19.75 per share AFTER coveringall claims with interest and the preferred stock.

Furthermore, US Airways' hostile offer for Delta Airlines last week --aside from signaling directly the consolidation trend in the legacy carriermarket from which Northwest's value undoubtedly will increase -- demonstratesthe inherent value, recoverable by Northwest's equity holders, that a merger ofNorthwest with a strategic partner will create. US Airways announced that itexpects the combination to generate $1,650,000,000 of annual synergies, which is6.2% of the combined Delta/US Airways passenger sales. Assuming comparableproportional synergies to a Northwest merger with Continental (ContinentalAirlines is the most logical partner, but this analysis would be equallyapplicable to another carrier), then the synergies generated by a combination ofContinental Airlines with Northwest would be approximately $1,250,000,000annually. Valuing the company at a post-merger multiple of 5.25x EBITDARincluding one half of the synergies accruing to Northwest (the other half to themerger partner) results in an implied stock price of $33.50 per share.This is not a "what if" analysis. Experts have been calling forconsolidation for some time, and US Airway's offer for Delta Airlines suggeststhe starting point. SEE, E.G., Benjamin Silverman and Susan M. Donofrio, TWOEVENTS MAY TRIGGER AIRLINE CONSOLIDATION THIS FALL, Cathy Financial IndustryReport, September 22, 2006; Jeff Bailey, A REVITALIZED US AIRWAYS IS CREATING AMERGER BUZZ, N.Y. Times, July 31, 2006, at C2 ("The surprising early success ofUS Airways Group, the result of a merger last year, has led to somebehind-the-scenes talks among investors and airline executives that could leadto more industry consolidation in the months ahead"); Susan Carey and MelanieTrottman, MERGER TALKS BRING OUT FEAR OF FLYING, Wall Street Journal, April 21,2006, at C1 ("Most airline investors agree that consolidation would be great foran industry with too many airlines chasing too few dollars"). The value of themergers becomes immediately apparent in the change in trading prices of DeltaAirlines unsecured bonds following the November 15, 2006 announcement of USAirways' offer. The trading price of Delta Airlines bonds increased by fiftypercent in the week after the announcement, and Delta's board has neitheraccepted nor closed that transaction yet. Owl Creek believes, in fact, that Northwest is a MORE strategic asset to an acquirer than Delta Airlines due toits strong international network and its "Golden Share" in Continental Airlines.(4)

As discussed above, all of the recent developments in the Northwestcases and in the airline industry in general, demonstrate that the Debtors donot "appear to be hopelessly insolvent" or at least that it is "important . . .to give the benefit of the doubt to [Owl Creek] here."(5) The applicable legalstandard on consideration of a request for the appointment of a Northwest EquityCommittee is not whether the Debtors are insolvent, but, rather, whether theDebtors "appear to be hopelessly insolvent." IN RE WILLIAMS COMM. GROUP., 281B.R. at 220-21 (noting "there is no clear litmus test" in determining whether adebtor is insolvent and stating that the determination is "a practicalconclusion based on a confluence of factors"). Here, in particular based oncurrent market valuations, the possibility of merger transactions to unlockfurther value, and the very real risk of a NATIONAL GYPSUM, K-Mart, or theintended (but averted) MIRANT CORP. outcome, the Northwest shareholders have areal economic interest at stake in these cases, and the Debtors do not "appearto be hopelessly insolvent."

OWL CREEK'S REQUEST IS TIMELY. The Court recently granted the Debtors'exclusivity motion [Docket No. 2863] (the "EXCLUSIVITY MOTION") that extended the deadline of the Debtors' exclusive right to file a plan of reorganization and the deadline to obtain acceptances of such plan to January 16, 2007 andMarch 16, 2007, respectively. In the Exclusivity Motion, the Debtors confirmedthat the cases are large and complex, and that the Debtors have not yetfinalized their business plan. SEE Exclusivity Motion at 6-9 and 12-13. Thus, ifyou were to appoint the Northwest Equity Committee now, Northwest's shareholderswould have the opportunity to be represented effectively in the process prior toany reorganization proposal. SEE IN RE MCLEAN INDUS., 70 B.R. 852, 862-63(Bankr. S.D.N.Y. 1987) ("Committees should generally be formed at an early stageso that adequate representation can be afforded before significant bridges are crossed").

SHAREHOLDER REPRESENTATION OUTWEIGHS THE ADDITIONAL COST. A Northwest Equity Committee will necessarily impose certain expenses to the debtors'estates. But "cost alone cannot, and should not, deprive . . . security holdersof representation." IN RE MCLEAN INDUS., 70 B.R. at 860. Northwest is an enterprise with over $16 billion in value (based on current securities pricing and capitalized rents) if not more. Equity value alonecurrently exceeds $200 million, has approached $300 million, and may be in thebillions. Owl Creek submits that the Northwest Equity Committee costs will be negligible when compared to the value at issue in these cases and the value ofthe shareholder interests the Northwest Equity Committee will protect. And, aswith any retained professionals, the Northwest Equity Committee's professionalsmust comply with the strictures of the Bankruptcy Code and the United StatesTrustee's and the Court's oversight of professional fees and expenses. Here, thebenefits of official committee representation of shareholders' interests faroutweigh any minimal (under the circumstances) additional costs to the Debtors' estates.

Accordingly, Owl Creek respectfully requests that you solicit interest in the appointment of a Northwest Equity Committee at your earliest possible opportunity. We and the Owl Creek principals are available to address any questions or comments you may have at any time. Thank you for your consideration of this letter.


David S. Rosner

(1) NWA Aircraft Finance, Inc. filed its chapter 11 petition sixteen days later on September 30, 2005.


(3) "EBITDAR" means earnings before interest, taxes, depreciation, amortization, and aircraft rent and is a commonly used valuation measure in the airline industry.

(4) In late 2000, Continental Airlines purchased 6.7 million shares of CAL held by Northwest, representing an equity position of close to 15% for $450 million. As part of the transaction, and for the stated reason of preserving the Continental/Northwest alliance, Northwest requested the "Golden Share." Northwest's ownership of the Golden Share gives it the ability to block changes of control transactions involving Continental Airlines and a third-party major air carrier.

(5) DELPHI CORP., March 22, 2006 Hearing Transcript at pp. 166-167.

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