Frontier OKs New Suitor’s Merger Offer : People Express Bid Tops Texas Air’s Ante for Carrier
People Express said Tuesday that it has agreed to pay $24 per share, or $300 million, in cash for Frontier Holdings, thus defeating a $22-per-share bid from Texas Air Corp.
The board of Denver-based Frontier Holdings, parent of Frontier Airlines, quickly approved the People Express offer. RKO Enterprises Inc., Frontier’s largest shareholder, also approved the deal by agreeing to sell its 45% stake to People Express.
Newark, N.J.-based People Express also was granted an option to buy up to 2.1 million authorized but unissued shares of Frontier stock, which, along with RKO’s stake, gives it majority control of Frontier and freezes out any new competing bids from Texas Air or another party.
The bid by 4-year-old People Express--which has used a discount-fare, no-frills approach to become one of the nation’s fastest growing airlines--will create a nationwide airline system combining Frontier’s strength in Western markets with People Express’ large presence in the East.
The deal also may have saved Frontier from a potentially hostile battle against Texas Air.
Balked at Bid
Frontier’s board last week refused to endorse Texas Air’s offer, made originally at $20 per share on Sept. 19. Frontier contended, among other things, that a Texas Air-Frontier combination may not have won federal antitrust approval because Texas Air’s Continental Airlines unit and Frontier are major competitors in Denver.
Texas Air raised its bid to $22 per share Tuesday, just hours before the People Express bid was announced.
The People Express bid also was endorsed by a coalition of four Frontier labor unions, which agreed to drop their own $17-a-share offer for Frontier. The union coalition, wary of hard-nosed labor relations by Texas Air President Francisco A. Lorenzo, had sued the Houston-based firm in an attempt to block its offer.
Texas Air spokesman Bruce Hicks said the firm would have no immediate comment on the People Express bid. Texas Air was recently thwarted in its bid to acquire Trans World Airlines.
The acquisition is subject to ratification by the four labor unions as well as approval by the Department of Transportation. The latter, however, is not expected to be a problem because the carriers share only one route in common, Denver to San Diego.
“We think we can be fairly optimistic about DOT approval,” Frontier spokeswoman Sandra Allen said.
People Express did not specify how it would finance the deal, but one analyst said the company would probably use bank loans and part of its about $100-million cash reserve.
Frontier, which lost $31.4 million in 1984, would be operated as a separate entity, People Express said.
If approved, the deal would create an airline with revenue of more than $1.5 billion based on projected revenue for this year, putting the combined carrier among the nation’s 15 largest airline systems. The deal also would represent the first expansion through acquisition for People Express, which until now has achieved its phenomenal growth solely from route expansion and aircraft purchases.
The firm was formed in 1981 by a group of executives from Texas International Airlines, now Texas Air. By keeping labor and overhead costs low and stressing no-frills, low-fare service, People Express expanded quickly from its Newark hub and now flies coast to coast to cities in the West, including Los Angeles, as well as to London and Brussels.
A ‘Natural Step’
John Pincavage, an airline industry analyst for Paine Webber, said the acquisition of Frontier is a natural step for People Express. “They could run a ‘Newark’ for the whole western part of the United States,” he said.
However, rising costs and increased competitive pressures from older carriers contributed to a meager $1.6-million profit last year and a $5.7-million loss in this year’s first half.
Consequently, some analysts questioned whether the deal is the best move for People Express, given its need to strengthen its earnings while handling the new round of expansion.
