Texas Air Makes Bid to Acquire Control of Rival Frontier Airlines

Texas Air Corp. on Thursday announced a tender offer worth as much as $140 million to acquire up to 56% of Frontier Holdings, parent of Frontier Airlines. The offer comes only a week after Texas Air officially failed in its attempt to acquire Trans World Airlines.

Texas Air is offering $20 a share for up to 7 million of Frontier’s 12.5 million shares outstanding, proposing to acquire the rest once the deal is approved by federal regulators.

If approved, the total acquisition price could total as much as $250 million. Texas Air already owns 800,000 shares, or 6.4%, of Frontier.

The move by feisty Texas Air represents an attempt to acquire a major rival, since both lines operate major routes out of Denver. Frontier rejected a bid by Texas Air earlier this year due to fear of potential antitrust problems.

Union Resistance

The move also could meet severe resistance from Frontier’s unions, which have already agreed to acquire the airline for $17 a share.

About 45% of Frontier is owned by Gencorp, formerly General Tire & Rubber, which has been known to want badly to sell its holdings in Frontier.

Houston-based Texas Air, which also controls Continental Airlines and New York Air, said its bid was conditioned in part on reaching a stock merger agreement with Frontier. It said it has sufficient funds to finance the tender offer.

Although it lost its bid to acquire TWA, it expects to earn a profit of about $50 million by selling its TWA stock and agreeing to drop a merger agreement with TWA.

Robert Schulman, spokesman for Frontier, said the carrier would have no comment on the bid, which was announced at a news conference by Philip J. Bakes Jr., Continental’s president.

Officials of the Frontier Employee Coalition, the union group that made the bid, could not be reached for comment.

1983 Bankruptcy

Texas Air Chairman Francisco (Frank) Lorenzo has been viewed as anti-labor by unions that have accused him of throwing Continental Airlines into bankruptcy in 1983 to abrogate its labor contracts.

Frontier’s board has already accepted the unions’ $17-a-share bid, and the deal is scheduled to be voted by shareholders Oct. 30.

Union fear of a Lorenzo takeover at TWA was a major factor in New York financier Carl C. Icahn’s winning control of the airline, even though Texas Air had offered a higher price. Icahn owns at least 52% of TWA.

Texas Air said the Frontier bid was “friendly,” but when asked what it meant by that, a Texas Air spokesman said the proposed acquisition is “good for Denver, it is good for Frontier and it is good for the consumer.”

Four of Frontier’s five major unions had agreed to buy all of Frontier’s 12.5 million outstanding common shares in return for cost concessions. The union workers would, under the agreement, have gotten 80% of the airline’s stock, while non-union and management personnel would have received 10%. Management would also have had the right to acquire the remaining 10% through stock options for key personnel.

There are 46,000 employees in the four unions participating under the employee stock ownership plan. There are another 3,500 non-union employees and 500 management personnel.

The unions are the Assn. of Flight Attendants; the Air Line Employees Assn., which represents customer service and reservation personnel; the Transport Workers Union, which is made up of dispatchers, and the Air Line Pilots Assn. A fifth union, the 600-member International Assn. of Machinists, has not yet reached an agreement with management.

Frontier has estimated that the concessions by the four unions and the non-union group would result in annual savings of $32 million.

Frontier lost $31.8 million for all of 1984. In the first six months of 1985, largely as a result of the strike at United Airlines and the sale of aircraft, Frontier had a net profit of $20.6 million.

The employee buy-out is being funded by the sale of company assets in return for the concessions that will make Frontier more competitive.

Selling Assets

The company has been selling its assets and purchasing its own stock. Frontier realized $400 million from the sale of 25 Boeing 737s to United Airlines. Of these, 10 have already been delivered to United and 15 are being leased by Frontier until next spring, when they will be replaced by 38 leased 737s and four McDonnell Douglas MD-80s.

Analysts generally viewed Texas Air’s bid positively.

“This will clearly put Continental and Frontier in a formidable position at one of the best hubs in the country,” said Timothy Pettee of L. F. Rothschild, Unterberg, Towbin.

Frontier links Denver with 55 other cities in 22 states and Canada. It has 340 daily flights, of which 120 are from Denver. It is the 15th-largest airline in the United States carrying 7 million passengers a year.

It has 24% of the traffic in and out of Denver, slightly under Continental. United, with 336 flights in and out of Denver, is the largest carrier there.

It is not the first time that Texas Air has gone after Frontier. Earlier this year, Frontier Holdings rejected a $185.6-million, or $16-a-share, merger offer from Texas Air.

Frontier ended its talks with Texas Air in April, according to individuals close to both sides. Frontier’s board was advised then that the Justice Department probably would recommend disapproval of a merger of the two rivals on antitrust grounds.

Nothing to Say

A Justice Department spokesman, Mark Sheehan, said late Thursday that the department would have nothing to say until it files its official comments with the Department of Transportation, which must approve airline mergers.

A Department of Transportation spokesman said that, since Texas Air has interests in other airlines, it will have to file for permission for the merger. The spokesman said it would take six months for a decision to be forthcoming.

Louis Marckesano, an analyst with Janney Montgomery Scott in Philadelphia, said Texas Air might be going after Frontier to “get Frontier’s route system.” Texas Air also might be trying “to basically short circuit a low-fare competitor out of (its) main hub.”

Texas Air said certain conditions apply to its offer, including Department of Transportation approval, tender of at least 5.5 million shares and a stock-merger agreement between Texas Air and Frontier Holdings.