Move Seen as Victory for Icahn’s Takeover Bid : TWA Spurns Texas Air Suggestions
Financier Carl C. Icahn won a major victory Tuesday in his quest to take over Trans World Airlines when the airline’s board of directors refused to take any of the steps suggested by rival suitor Texas Air Corp. to block his bid.
The decision, taken at a meeting that lasted more than four hours, will almost certainly thwart the merger of TWA and Texas Air, which would have been the largest in airline history. The two companies had agreed in June on a deal worth about $793.5 million that would have made TWA a wholly owned subsidiary of Texas Air.
Bruce Hicks, a spokesman for Texas Air, which now owns 6% of TWA’s common stock, said after the TWA announcement: “We are disappointed, but the board gave very fair consideration to our proposal. We are assessing the situation to see where we go from here.”
He added that it would be “very difficult” now to obtain approval from TWA shareholders for Texas Air’s $26-per-share bid for TWA.
Icahn, who has been buying TWA stock for about a year, has a 45.54% share in the nation’s fifth-largest air carrier and has offered $24 per share for the rest.
A source close to Icahn said late Tuesday that Texas Air Chairman Francisco Lorenzo “can’t win. Icahn needs only a handful of votes over those he owns. Simple mathematics will tell you he’ll get the majority he needs.”
TWA’s board issued a statement saying that “the board considers it very important to TWA stockholders that, in light of Mr. Icahn’s presumptive ability to block the Texas Air merger, TWA should have available to it Mr. Icahn’s $24 merger proposal. We think $24 per share . . . is an excellent price for our shareholders.”
In a telephone interview, Icahn said he hopes to complete an acquisition by Nov. 30. “I think it is sort of getting near the end,” he said of the three-month battle for control.
Texas Air Tactics
Faced with Icahn’s all but insurmountable holding, Texas Air recently has been suggesting to TWA’s board several ways to prevent Icahn from winning control of the airline. One was to grant Texas Air an option to buy some of TWA’s key assets, including its transatlantic routes, associated equipment and facilities and possibly its PARS computer reservation system.
Another was that the TWA board should consider letting Texas Air buy a new class of preferred stock with special voting rights. A third was to redeem TWA’s cumulative convertible preferred stock, which would have resulted in the issuance of additional common shares, diluting Icahn’s stake to 33.3%.
TWA’s board said it decided against the moves to avoid any action that “could lead to dismemberment of the airline.” However, it was also clear that the board feared possible legal repercussions.
“The board also decided not to issue to Texas Air a preferred stock with multiple votes,” its statement said. “The board considered such a tactic to be of uncertain legality and could be deemed an inequitable business practice, in that its sole purpose would have been to neutralize the voting power which Icahn has paid over $250 million to acquire in the marketplace.”
Icahn appeared in person for more than an hour to present his case to the board. The board said it had received a letter from him pledging that, if it declined to grant “lock-ups” of the type suggested by Texas Air, he would agree to allow Texas Air’s merger proposal to be voted on by TWA stockholders and to hold open his own offer for two weeks after that vote.
According to Ulrich V. Hoffmann, TWA’s general counsel and senior vice president for external affairs, the Texas Air proposal is “still in place.” He said that no date had been set for a shareholder vote and that “it’s now up to Texas Air to decide what to do next.”
A Texas Air official, who asked not to be identified, conceded that Texas Air’s merger attempt is “all but dead.”
TWA’s board said it was influenced by the fact that a merger with Icahn could be consummated more quickly than with Texas Air and would not be subject to Department of Transportation approval.
It said it also took into account the backing that Icahn has received from two major unions at TWA, those representing pilots and machinists. In return for large concessions in wages and benefits, Icahn has agreed to give the union members 20% of the airline and a share in the profits.
The unions sided with Icahn because of Lorenzo’s record at Continental Airlines, owned by Texas Air. Lorenzo put Continental into bankruptcy in 1983, thereby breaking the carrier’s labor contracts, and then cut wage scales almost in half.
According to Louis Marckesano, airline analyst with Janney Montgomery Scott of Philadelphia, the concessions will save TWA close to $300 million annually. As a result, he said, TWA “will earn $3 per share plus in 1985 and $4 per share plus in 1987.” Without the concessions, TWA would lose money or break even this year, he estimated.
“The action taken by the board is a positive step,” Marckesano said. “Icahn got concessions from the unions that TWA management could not get. And Lorenzo would not have been able to get them by hook or crook. The price is that Icahn will not sell off the assets of TWA. We view this as a long-term plus for the employees, the stockholders and the public.”
