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Texas Air to Buy TWA in Biggest Airline Merger

Times Staff Writer

In a deal worth $793.5 million, Trans World Airlines agreed Thursday to be bought by another airline operator, Texas Air Corp., ending more than a month of unwelcome courtship by corporate raider Carl C. Icahn.

Directors of the two companies unanimously approved the merger--the largest in airline history--which would make TWA a wholly owned subsidiary of Texas Air. Texas Air itself is not an airline but the parent company of two air carriers, Continental Airlines and New York Air.

If merged, Texas Air and TWA would become the nation’s second-largest airline, behind United Airlines but slightly ahead of American Airlines, based on revenues. TWA alone currently ranks fourth behind American and Eastern airlines, while Continental alone ranks eighth.

Latest in Series of Mergers

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The deal is the latest in a series of airline mergers and failures since Congress deregulated the industry in 1978. Many airline experts believe that eventually only a handful of the major carriers today will survive into the 1990s, because of increased competition and the new, lower cost lines like Continental that emerged after deregulation. The TWA-Texas Air deal, some experts say, could signal a new round of consolidations.

The deal represents also a personal victory for Francisco A. Lorenzo, Texas Air’s president and chief executive, who failed in a 1979 attempt to seize control of TWA. Lorenzo, one of the nation’s most controversial airline executives, also failed in efforts to acquire National Airlines in 1979 and Frontier Airlines earlier this year.

The transaction, in which Texas Air will exchange $19 in cash and one share of a new preferred stock worth $4 for each common share of TWA, will give Lorenzo control of an air carrier operation with almost 300 planes and routes that stretch from the South Pacific to Europe and the Mediterranean, as well as across the United States to Central and South America.

Airline analysts said that the merger makes good business sense, because Continental’s domestic routes complement TWA’s international flights. However, these experts say, Texas Air could face labor strife at TWA, which has among the highest labor costs in the industry and is facing the possibility of a strike by its unionized flight attendants.

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‘A Terrific Network’

Independent airline industry analyst Charles Hanneman said of Lorenzo: “He has a workable, profitable, worrisome-to-the-rest-of-the-industry, low-cost, low-fare airline. Now he is taking on TWA, and it will become a terrific network. He has become a major force in the American airline industry.”

The merger agreement specifies that TWA will keep its independent identity, with its own board and management, composed largely of the airline’s current directors and officers.

The company, which is nearly 60 years old, began life as a carrier using a combination of trains and planes to cover routes between New York and Los Angeles. One of its first pilots was Charles A. Lindbergh, who, after his historic feat of flying solo across the Atlantic, flew for what was then Transcontinental Air Transport. The airline became widely known as “The Lindbergh Line.”

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Wall Street sources said that Icahn, who, together with an investor group that he controlled, had acquired 32.77% of TWA and offered to buy the rest for $18 per share in cash, was “not thrilled” with the transaction despite the profits that he stands to reap from his short-lived investment. His offer had been rejected as inadequate by TWA’s management, which, convinced that he intended to sell off the airline’s assets once he gained control, had opposed him from the beginning.

Icahn, who denied that he wanted to dismantle TWA, began buying TWA shares last summer and accumulated 11.23 million shares at an average cost of $16 a share. Thus, his cash profit from the Texas Air deal will be more than $33 million. He would receive a further $44-million worth of the preferred shares, but he has indicated that he does not want to keep them. Instead, he is expected to sell them at a discount. He has indicated to Wall Street sources that his final profit will be about $50 million.

In a news release and in a telephone interview late Thursday, the New York financier said that he does not intend to be a “spoiler” and thus will not use his holdings to prevent TWA stockholders “from taking advantage of the best available bid.” He said that he does not intend to make a higher bid or buy more shares.

Richard D. Pearson, executive vice president and chief operating officer of TWA, said in a telephone interview that the airline might still be independent if Icahn had not attempted a takeover. TWA stock, which had been trading at about $11 at the start of the year, closed Thursday at $20.25, up 62 1/2 cents.

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Pearson admitted that TWA had sought a so-called “white knight"--an acceptable merger partner--to prevent an Icahn takeover. In the course of fighting off Icahn, TWA held negotiations with several other suitors, including Eastern Airlines and Resorts International, the casino-hotel company.

“This was a friendly transaction,” Pearson said. “Friendly transactions don’t happen unless something precipitates them.”

In addition, a group called the TWA Employees Committee said that a buy-out by employees was a feasible alternative. After the Texas Air deal was announced, a spokesman for the group, Ted Higley, said in Kansas City that it was still “committed” to buying the airline.

May Make Higher Bid

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He said that the group is consulting with its bankers to see if it can come up with a higher bid than that of Texas Air.

Airline industry observers generally took a wait-and-see attitude regarding the merger. But they said that the Texas Air takeover was better than some of the alternatives.

“Lorenzo might be able to help TWA realize its potential,” said Louis Marckesano, airline analyst for the Philadelphia brokerage house of Janney Montgomery Scott. “He’ll probably keep present management intact, so it is probably the best deal TWA could cut under the circumstances.”

The deal fulfills Francisco Lorenzo’s dream of running a major U.S. airline. Details in Business.

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