Judge Approves AA-US Airways Merger; Reorganization Deadline Extended

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By Paul Stinson

AUSTIN, Texas--American Airlines cleared a significant hurdle in its bid to become the world's largest airline March 27 as a U.S. bankruptcy judge approved the proposed $11 billion merger of the Chapter 11 debtor with US Airways Airways (In re AMR Corp., Bankr. S.D.N.Y., No. 11-15463-SHL, bench ruling 3/27/13).

The approval also helps cut a path to help AMR Corp. --the parent company of American--emerge from bankruptcy protection this year.

“Judge Lane's approval of the merger agreement today allows us to continue progressing forward with our planned merger and we are gratified to know that he considers the merger an 'excellent result' for stakeholders,” the pair of airlines said in a joint statement.

The Fort Worth, Texas-based airline announced its ambition to join forces with US Airways in mid-February, hailing the deal as capable of producing an “expected” $1 billion in “annual synergies” from 2015 that would create value for stakeholders of both companies.

Subject to regulatory approvals and approval by US Airways shareholders, completion of the merger is expected in the third quarter of 2013.

Merger Seen Providing Recovery Potential.
As explained by American Airlines in a Feb. 14 statement detailing the terms of the merger, stockholders of US Airways will receive one share of common stock of the combined airline for each share of US Airways common stock then held, accounting for 28 percent of the combined company's common stock.

The remaining 72 percent diluted equity ownership of the combined airline will be issuable to stakeholders of AMR and its debtor subsidiaries that filed for relief under Chapter 11 (the “Debtors”), American's labor unions, and current AMR employees.

“This merger provides enhanced potential for full recovery for our creditors,” American Airlines' Chief Executive Officer Thomas W. Horton said in a nine-page statement, adding that he was “pleased” to receive the support of a “sizable portion of our unsecured creditors” for a plan portrayed by the chief executive officer as providing “a recovery of at least a 3.5% aggregate ownership stake in the combined airline for our shareholders.”

Horton said it was “unusual” in Chapter 11 cases--and “unprecedented” in recent airline restructurings--for shareholders to receive meaningful recoveries.

Fate of AA CEO Severance Unclear.
Although the judge approved the merger agreement, the ruling defers on issuing a judgment relating to the proposed $19.8 million severance payment to Horton.

U.S. Trustee Tracy Hope Davis filed an objection to AMR Corporation's motion to approve certain employee compensation and benefit arrangements March 15 in the U.S. Bankruptcy Court for the Southern District of New York (In re AMR Corporation, Bankr. S.D.N.Y., No. 11-15463 (SHL), objection filed 3/15/13) (25 BBLR 384, 3/21/13).

Judge Lane expressed the view that Horton's severance should not be part of the Merger Agreement, but should be addressed in the anticipated Plan of Reorganization (POR) for AMR's exit from bankruptcy, according to a March 27 statement authored by the Allied Pilots Association, which represents the pilots of American Airlines.

People familiar with the proceedings confirmed to BNA via email on April 2 that the bankruptcy court order had yet to be filed, commenting on April 1 that they had been “told to expect” the filing to occur “sometime this week.”

Bankruptcy Reorganization Deadline Extended.
Although the court order granting approval of the merger has yet to be filed, Judge Lane filed the court's approval of AMR's request to extend the deadline to file its bankruptcy reorganization plan from April 15 to May 29, remarking that the motion was “in the best interests” of debtors, their estates, creditors and all parties of interest.

As noted by the Allied Pilots Association, creditors will have 60 days to object to the reorganization plan filed by AMR before the judge can offer approval and permit the company to exit Chapter 11 bankruptcy.

AMR filed its request March 13, arguing that “ample cause” existed to grant the airline the requested extensions of the Exclusive Periods, advocating that additional time was needed “to appropriately complete the reorganization process and achieve a result that will maximize value for all parties in interest.”

The motion contended that such an approach was warranted given what it described as the “substantial good faith progress” made to achieve the objectives of Chapter 11, adding that progress encompassing labor cost savings, managerial efficiencies “and other economies” will assist in making the airline cost competitive.

“The work proceeds on many fronts concurrently, but is time and resource demanding, and has not been fully completed,” the motion filed on behalf of AMR reads.

By Paul Stinson

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