American Airlines bankruptcy, merger deals were complex, expensive
By MARK CURRIDEN and NATALIE POSGATE
As Thanksgiving 2011 approached, Gary Kennedy was in a familiar spot. For the second time in a decade, American Airlines was spiraling toward bankruptcy.
“The time was right, and I fully advocated filing [for restructuring],” said Kennedy, American’s top in-house lawyer.
The debt and financial losses were too big. The labor costs were too high. American was the only major airline not taking part in a massive industry consolidation.
Kennedy and his team of in-house and outside lawyers shepherded one of the most legally complex and sophisticated bankruptcy reorganizations, one that ends with an $11 billion merger with US Airways.
For the past 15 months, Kennedy and his lawyers attended thousands of hours of meetings and court proceedings. They negotiated simultaneously in New York, Phoenix and Dallas with lawyers for many interested parties: bankers, investors, creditors, shareholders, employees.
They knew that their end product would require approval by the bankruptcy judge and federal regulators.
“We took a difficult set of circumstances going into bankruptcy and we made them much more complex and challenging,” Kennedy said. “This has been the most intense, grueling project in my 32 years of practicing law. We’ve worked seven days a week, sometimes around the clock.”
The decision to file for Chapter 11 bankruptcy, which allows companies to reorganize and restructure while protected from creditors, came at the last minute, said Thomas Roberts, a partner at Weil, Gotshal & Manges, which Kennedy tapped to be the lead outside counsel for the case.
Lawyers in-house at American and at Weil, which is widely regarded as the nation’s most prominent bankruptcy practice, were informed of the decision to prepare to file for bankruptcy only days before Thanksgiving. They were told they would need to work through the holiday, but they could not give even a hint to family members about the case.
Kennedy’s next decision was where to file: Fort Worth or the Southern District of New York.
“We gave great consideration to venue and it was my determination that we file in the Southern District because the judges there have the experience and expertise in these highly complex kind of matters,” Kennedy said.
In an ironic twist, the bankruptcy was assigned to U.S. Bankruptcy Judge Sean Lane, a federal government tax lawyer who was new to the bench and had never handled such a big case.
Phase one of the bankruptcy was to address labor issues and costs, said Roberts.
Phase two: Consider mergers.
“The company knew consolidation was likely,” Roberts said. “The question was when to do it. Many potential consolidation candidates were thought to be reluctant to engage while American was in bankruptcy. And clearly American had less bargaining power in bankruptcy than it would have outside of bankruptcy.”
Hello, US Airways
Then came the game-changing moment: US Airways forced its way into the legal proceedings.
“When US Air was allowed to file a proposed labor agreement with the bankruptcy court, that was key,” Kennedy said.
Lane had made it clear that any plan needed support from labor. And US Airways had it.
Merger discussions “picked up in earnest” in November and we’ve basically been going around the clock for the past several weeks,” said Glenn West, who is the managing partner of Weil’s office in Dallas.
Dozens of the nation’s most prominent bankruptcy and M&A lawyers basically lived in a half-dozen conference rooms on the third floor of the Crescent Court Office Towers, where Weil’s Dallas offices are located. Barbecue from Sammy’s and Mexican food from Blue Mesa was catered in day and night.
“Some issues would grow bigger and then shrink only to grow bigger again. Some issues would come out of left field,” said West, who led the merger talks. “It is an intense deal with lots of moving parts.”
Six words were repeated over and over during the negotiations: “That has never been done before.”
“What is so unique here is that the surviving company in this merger is the company in bankruptcy,” said West, who notes that has happened only one or two times in history and never in a deal so large.
Another example of the uniqueness involved the number of parties agreeing to the deal. Normally, mergers involved one company buying another company. If the companies agree, then it is a done deal.
“But in this agreement, there are additional constituencies, including the unsecured creditors with their own set of issues to negotiate and the ad hoc committee of debt holders,” West said. He also points out that the deal, which must be agreed to by US Airways shareholders, must also receive Judge Lane’s approval.
“This was a very complicated case involving a very large and complex iconic company — iconic not just in Dallas, but in the world,” Roberts said. “There was a gigantic legal morass to go through” to reach this agreement.
Roberts said his team at Weil has worked more than 75,000 hours on the bankruptcy and the merger. Bankruptcy court records show that the firm has charged more than $57 million in legal fees and expenses.
Overall, AMR has spent more than $172 million in legal fees and legal expenses since it filed Chapter 11. A small fraction of that is to pay for legal disputes unrelated to the bankruptcy or the merger.
“It’s certainly been more expensive than I anticipated, but it also has taken longer and more complicated than I thought,” Kennedy said.
At the end of the day, Kennedy said he believes AMR has gotten what it has paid for.
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