TWA Offers $1.6 Billion in Surprise Bid to Buy USAir
Trans World Airlines Chairman Carl Icahn startled the airline industry Wednesday by offering to buy USAir for more than $1.6 billion, which would be the most ever paid by one airline for another.
The move is Icahn’s latest bid to create an airline empire. He battled for nearly a year to gain control of TWA, succeeding in January of last year, and subsequently acquired Ozark Airlines. Icahn’s new acquisition effort could propel TWA into a tie for second place among the nation’s airline companies.
USAir itself, based in Arlington, Va., has been active in the industry’s merger mania of the last two years. It is very close to completing its $400-million takeover of Pacific Southwest Airlines (PSA) and is now trying to take over Piedmont Aviation, parent firm of Piedmont Airlines.
The TWA offer of $52 cash for each of USAir’s 31.56 million common shares was contained in a letter Icahn sent to Edward I. Colodny, chairman and president of USAir. Icahn stunned analysts and USAir officials by disclosing that he is already USAir’s largest shareholder and indicated that if a friendly agreement is not reached, he is prepared to wage a hostile tender offer for the rest of USAir’s stock.
TWA declined to say how many of USAir’s shares Icahn owns or when he purchased them. He has not filed a report of such purchases with the Securities and Exchange Commission, which requires the owners of more than 5% to do so. However, the SEC allows 10 days for such filings. Even David Shipley, a USAir spokesman, said the Icahn holdings “are news to me.”
In his letter to Colodny, Icahn also raised the possibility of a “three-way combination among USAir, Piedmont and TWA.” Such a combination, which is presumed to include Pacific Southwest, would move TWA, now the nation’s sixth-largest carrier, into a tie for No. 2 with United Airlines.
First-place Texas Air Corp., which owns Continental Airlines and Eastern Airlines, also has absorbed People Express and New York Air. American Airlines, now third, would drop to fourth if Icahn acquires USAir and Piedmont.
Looking for Partner
Although Icahn said last year that he might be willing to sell his stake in TWA, he has said in several public talks more recently that TWA is looking for a merger partner.
“Icahn realized (in this competitive environment) that he either had to sell out at the right price or go out and acquire another airline,” said Paul Karos, airline analyst with the New York brokerage house of L.F. Rothschild, Unterberg, Towbin.
But another analyst, who declined to be identified, said it is not certain that the deal proposed by Icahn will ever be completed. He said there will be other bids for USAir. “The price (of $52) is too low,” he said. “Most of the other airline acquisitions recently have been for between two and 2 1/2 times book value (assets minus liabilities). USAir’s book value is at least $30 (per share), so I think it is worth at least $60--or more than $1.9 billion.”
USAir declined to comment on the offer. Piedmont, whose directors held a special telephone conference Wednesday, was said to have been close to accepting the USAir offer before the TWA offer was made public. But by the end of the day, Piedmont, headquartered in Winston-Salem, N.C., said the meeting had been “recessed . . . without taking action on proposals to combine Piedmont with other corporations.”
On the Auction Block
Late last month, Piedmont put itself on the auction block after declining a takeover offer from Norfolk Southern worth nearly $1 billion. Norfolk Southern already owns about 19% of Piedmont.
Icahn alluded to previous talks with Colodny. “As we discussed,” he said in his two-page letter, “we believe that a merger or other business combination between TWA and USAir would be in the best interests of the shareholders of both companies. . . . Our offer of $52 per share represents a substantial premium to USAir’s common shareholders over yesterday’s (Tuesday) closing price of $43.75.”
USAir stood at $47 when its stock was suspended from trading Wednesday.
But Icahn, an entrepreneur who has received high marks for pulling TWA out of the financial tailspin it was in when he gained control, warned, “If a negotiated transaction is not acceptable to you, we may make an offer directly to USAir’s shareholders for up to 51% of USAir’s outstanding stock.” He said TWA was filing a notice of its intentions with the Department of Transportation, which must approve all airline mergers.
Icahn’s bid for USAir could complicate USAir’s bid for San Diego’s Pacific Southwest. “We don’t know what (TWA’s offer) means,” Pacific Southwest spokeswoman Margie Craig said Wednesday. “We haven’t had a chance to evaluate it, so we don’t know the implications.”
Action on PSA Move
PSA’s board has agreed to be acquired by USAir and shareholders are expected to overwhelmingly approve the acquisition at a meeting March 17. That meeting will not be postponed, Craig said.
USAir has conditioned its proposed acquisition on PSA’s management winning contract modifications from its union employees.
PSA’s 600 pilots and a dozen flight controllers have agreed to USAir’s demand that the unions agree to changes in contract provisions that give PSA’s unionized employees special rights in the event of a merger or acquisition. However, PSA has yet to conclude negotiations with the Teamsters, which represents 3,000 flight attendants, ground personnel, mechanics, station and reservation agents.
“Icahn wants to set up another Texas Air holding company and we’re not going to let that happen,” Bill Genoese, director of the Teamsters’ airline division, said Wednesday.
Defiant Teamster Stance
Genoese said Icahn took his first step in that direction when he acquired Ozark “and cut the (pay of) pilots, flights attendants and mechanics back to TWA levels. And he’s not going to bring USAir down to to TWA’s levels.” Since TWA’s flight attendants struck unsuccessfully last year and since pilots agreed to wage concessions, TWA has one of the lowest labor costs in the industry.
Delta Airlines, United and American should view Icahn’s move as a threat, the Teamsters official said, adding, “I don’t think (American Airlines’ Chairman Robert) Crandall is going to be able to sleep tonight.”
The Teamsters airline division represents 3,000 PSA employes and about 1,400 USAir workers. The union does not represent any TWA employees.
According to Airline Economics, a Washington, D.C., consulting firm, the combination of TWA, USAir, PSA and Piedmont would have a 16% market share in terms of revenue passenger miles, about the same as that of United. Texas Air has a 20% market share and American has 14%.
Analyst Karos said a merger of the other airlines into TWA would not be without problems. “You would have a lot of different labor pay scales,” he noted. “You would have to work a long time to blend them together, and it would be difficult.”
Besides the expected labor confrontations, Karos said TWA would go deeply into debt. But he added that he believes Icahn, who recently sold his huge holdings in USX Corp. after giving up a fight for control of that company, would be able to come up with the money.
Times staff writer Greg Johnson in San Diego contributed to this story.
