U.S. Seems Unlikely to Oppose Merger

Texas Air’s acquisition of Eastern Airlines appears all but certain to overcome regulatory obstacles, airline industry observers said Tuesday, but securities professionals split over whether the $600-million-plus price represented a bargain and whether Texas Air can pare Eastern’s high operating costs.

Few in the industry expect the Department of Transportation, which will review the deal, to erect any significant barriers on antitrust grounds, although Eastern and New York Air, a Texas Air subsidiary, together dominate the lucrative Boston-New York-Washington routes. The agency has six months to review the takeover after the companies file notices of the transaction.

“I’m sure they’ll take the full six months,” said Brad Lewis, manager of the Select Air Transportation mutual fund of Fidelity Investments in Boston, “but as long as Ronald Reagan is President, I don’t see any problem in getting this through.”

Because Eastern operates international flights--to Latin America and between Miami and London--Reagan has an additional two months to review the Transportation Department’s work. But a DOT spokesman said the President may overturn a DOT recommendation only on national defense or foreign policy grounds.

Delta Vulnerable

Eastern’s rival airlines are expected to file objections to the takeover with the DOT, but analysts said those filings would be treated as largely pro forma.

Among the airlines most vulnerable to competition from a revivified Eastern is Delta Air Lines, which shares with Eastern the lucrative traffic out of Atlanta’s Hartsfield International Airport. In Atlanta, a spokesman for Delta said that the carrier considers the terms of the Eastern-Texas agreement to be still ambiguous and added that “we’re not going to say anything until something is definite.” But he suggested that major airlines competing on Eastern’s routes would match any fare cutting undertaken by Francisco A. (Frank) Lorenzo, Texas Air’s chairman, to strengthen Eastern’s market share.

He cited statements made by Delta executives during past fare wars, pointing to the carrier’s exceptionally strong balance sheet. “We can bleed a little longer than the rest of them,” he said.

Some analysts argued Tuesday that Lorenzo is getting Eastern at a fire-sale price. In the words of John Pincavage, airline analyst for Paine Webber, Lorenzo “stole it.”

Pincavage estimates that, assuming Eastern retains its most recent wage and productivity concessions from its pilots and flight attendants unions and extracts a 15% cut from the International Assn. of Machinists, the airline could turn a substantial profit, perhaps $200 million, this year.

Eastern had net earnings of about $6 million in 1985.

With a $200-million profit, Pincavage said, the airline would be worth closer to $900 million, or $15 per share, rather than the about $600 million, or $10 per share, at which Texas Air’s offer is valued.

But Texas Air’s agreement with Eastern appears to freeze out any other potential bidders.

Escrow Payment

Texas Air will receive a $20-million escrow payment against its purchase of 11.2 million Eastern treasury shares at an option price of $6.25 in cash and securities, as well as an option to purchase another 10 million shares at $7.50.

Exercising those options, combined with the nearly 5% of Eastern that Texas Air already owns, would give Texas Air nearly 35% of Eastern.

Moreover, Eastern Chairman Frank Borman said bluntly at a press conference Tuesday that the company has received “no formal offers other than the Texas Air agreement.” Later, he added that Eastern has received no informal offers, either.

Still, some financial professionals argued that the agreement could break down if Eastern’s unions, which through a trust control 20% of the company’s voting stock, find Lorenzo to be as obdurate a negotiator with organized labor as his reputation suggests.

“If the unions could line up someone to buy 35%, with their own 20% they’d have a lot of power,” said Anthony Hatch, airline analyst for Argus Research Co. “I’m sure they’ve talked to a lot of candidates.”

Conjecture over potential counter-bidders had included several other airlines and, among non-industry companies, Resorts International, the Miami-based casino company that owns 10.4% of Pan Am Corp. and has expressed a desire to expand its presence in the international airline business.

Resorts International executives could not be reached for comment.

But most of the airlines that could benefit from combining their routes with Eastern’s, including Pan Am, scarcely have the wherewithal or the inclination to make a bid. Pan Am, like many other airlines, is already heavily burdened by debt.

Strategic Fit

Domestic airlines are also disinclined to take on Eastern’s still-high cost structure. Although analysts find that American Airlines might make a strategic fit with Eastern, American is intent on reducing its labor costs mostly by hiring pilots at its “B” wage scale, which is sharply lower than its traditional scale.

“If someone thought they could reduce costs, it might make sense to (bid for Eastern),” Hatch said. But of the airlines, he said, there are “none that strike me as in a position to do so.”