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AMR creditors prefer all-stock merger with US Airways: sources

By Soyoung Kim

NEW YORK (Reuters) - American Airlines creditors want a potential merger with US Airways Group Inc to be an all-stock deal rather than one that pays some claims in cash, three people familiar with the matter said, in a move that underscores confidence in a merged airline.

The creditors of American Airlines parent AMR Corp want to capture the full upside from a combination if the airline chooses to emerge from bankruptcy in a merger with its smaller rival, the people said this week.

Creditors in bankruptcy often want at least part of their claims paid in cash, rather than in the stock of a reorganized company with an uncertain trading value.

AMR creditors' preference for an all-stock deal could be seen as a vote of confidence in the proposed merger and the potential revenue and cost benefits from a deal that would create one of the world's largest airlines.

US Airways, in hot pursuit of its bigger rival all year, sounded out AMR creditors about how they wanted to be paid off before proposing a formal all-stock merger proposal at a meeting with the creditors committee in November, the people said.

The merger discussions among US Airways, AMR and its creditors are at an advanced stage, with a decision on whether to pursue a combination or emerge as an independent company expected as soon as January, they said.

The people asked not to be named because the matter is not public. Representatives for the creditors committee did not immediately respond to requests for comment.

AMR management prefers to exit bankruptcy as an independent airline, but events since US Airways made a formal merger offer last month indicate a deal looks more likely than before.

On Monday, the union representing AMR pilots voted to join the merger talks at the invitation of AMR creditors and said the first discussions involving the union are set to begin this week. US Airways' pilots union is also joining the discussions, a spokesman confirmed on Wednesday.

The Allied Pilots' Association, the union representing AMR pilots, is important to the discussions because they recently ratified a new labor contract granting them a 13.5 percent equity stake in a newly reorganized airline.

The APA, which also sits on the airline's nine-member unsecured creditors committee, has said it has lost faith in AMR management led by Chief Executive Tom Horton and strongly supports a merger with US Airways.

"As the new owners of a significant percentage of the restructured airline, it's APA's responsibility to maximize the value of our investment by conducting thorough due diligence," pilots union president Keith Wilson said in a message posted on the union's website on Wednesday.

AMR, in a separate statement sent to managers on Tuesday, said: "American ... determined that union involvement in the discussions is an important step to appropriately evaluate the impact of a merger on labor costs, integration and seniority."

US Airways declined to comment.

STICKY ISSUE

The talks are now narrowly focused on how to integrate labor unions, indicating the negotiations are far along, the people familiar with the matter said. Detailed valuation discussions - how much of the combined carrier each side should own - are expected to come after the parties iron out labor integration issues, they said.

Under the US Airways proposal sent in November, AMR creditors would own 70 percent and US Airways shareholders 30 percent of the merged airline, which could be valued at around $8.5 billion, sources told Reuters on Friday.

Based on US Airways' fully diluted market value of $2.5 billion and the proposed equity split of 70 to 30, its merger proposal implies a valuation of little less than $6 billion for its larger rival.

AMR creditors think they should own more than 70 percent of the combined company, the people familiar with the matter said. AMR management has told the creditors they believe the equity split should be as high as 80 percent in favor of AMR creditors, the people said.

An 80-20 equity split between AMR creditors and US Airways could suggest a $10 billion valuation for AMR, based on the $2.5 billion fully diluted market value of US Airways. It could also mean that AMR values its smaller rival at a significant discount to its trading value, which would be a tough deal to swallow for US Airways' shareholders and board.

The world's two largest airlines - Delta Air Lines Inc and United Continental Holdings Inc - have market values of $9 billion and $7.2 billion, respectively.

The case is In re AMR Corp et al, U.S. Bankruptcy Court, Southern District of New York, No. 11-15463.

(Reporting by Soyoung Kim in New York, additional reporting by Nick Brown in New York and Karen Jacobs in Atlanta. Editing by Andre Grenon)

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