USAir, Piedmont Agree to Proceed With Takeover
USAir Group and Piedmont Aviation, two profitable airline companies, said Monday they have agreed to proceed with a merger in which USAir will pay $1.59 billion cash for Piedmont.
The transaction is the latest and highest-priced consolidation in the airline merger frenzy of the post-deregulation era. The meshing of the two domestic carriers is viewed by airline industry observers as an excellent fit because Piedmont operates mainly in the Southeast while USAir’s routes are primarily in the Midwest and Northeast.
The price that USAir, of Arlington, Va., has agreed to pay for Piedmont is nearly double the $860 million that Northwest Airlines paid for Republic Airlines last year, the most costly airline industry merger to have been completed so far.
The proposed USAir-Piedmont marriage, which will create the nation’s seventh-largest airline company, has been approved by directors of both firms but must be blessed by stockholders and federal regulators. It appears to end several weeks of competition between USAir and Norfolk Southern, a giant railroad company, for the right to buy Piedmont, based in Winston-Salem, N.C.
And while that fight for control was nearing its resolution last week, Trans World Airlines Chairman Carl C. Icahn, in a surprise move, confused matters by offering to buy USAir.
Monday’s announcement appears to thwart Icahn’s 11th-hour attempt to merge USAir, with its strong domestic route system, into his carrier, the bulk of whose business is on overseas routes. But some analysts maintained that Icahn’s efforts to acquire USAir, with or without Piedmont, may not be at an end. TWA, they contend, will have difficulty surviving alone and must find a merger partner.
Mark Buckstein, general counsel for TWA, declined to comment Monday on the airline’s plans. But TWA on Monday did file with the Department of Transportation an amended and more detailed application to acquire USAir. An earlier application was denied late Friday because it contained too little information.
“We’re all waiting to see if Icahn has another strategy, another move in mind.” said Paul Karos, an airline analyst with the New York brokerage house of L. F. Rothschild, Unterberg, Towbin. “We’ll have to see if Icahn wants to battle it out.”
Icahn, who said last week that he had already acquired 15% of the stock of USAir, was temporarily restrained Monday by a U.S. District Court in Pittsburgh from acquiring any more.
Under the terms of the USAir-Piedmont merger agreement, which the companies said they agreed on Friday night, USAir began a $69-a-share cash tender offer for all of Piedmont’s 23.1 million shares of common stock outstanding.
The USAir offer is a sweetened version of its earlier proposals, which were combinations of cash and stock.
In the pending merger, each share of Piedmont common stock not purchased in the tender offer will be converted into the right to receive $69 per share in cash. USAir’s offer is conditioned upon the tendering of 50.1% of the shares.
Norfolk Southern had acquired a stake of nearly 20% of Piedmont’s stock, but USAir said Monday it has already purchased 2.3 million of those shares, representing 9.9% of Piedmont. USAir added that the railroad firm, based in Norfolk, Va., plans to tender the remaining 1.5 million shares it owns.
Norfolk Southern, though it lost out in the courtship of Piedmont, thus will profit handsomely anyway from the sale of the shares that it bought for an average price of $32.
USAir recorded revenue of $1.84 billion in 1986 and net income of $98.4 million; Piedmont had $1.87 billion in revenue and net income of $72.4 million. Their proposed merger was lauded by most analysts.
“The combined airline would dominate short-haul, high-yield traffic east of the Mississippi and operate the most . . . cost-efficient fleet in the industry,” said Timothy Pettee, airline analyst with the investment banking firm of Bear, Stearns.
The No. 7 ranking the merged company would hold is calculated in terms of revenue passenger miles. (A revenue passenger mile is one paying passenger carried one mile.) It would be slightly smaller in these terms than TWA, which already has merged with Ozark Airlines, and would account for about 7.2% of the industry’s business. The figure assumes the successful completion of USAir’s earlier purchase of Pacific Southwest Airlines.
The combined carrier would have the largest share of short-haul traffic between medium-sized cities in the Northeastern and Southeastern United States. It would have principal hubs in Baltimore; Charlotte, N.C.; Dayton, Ohio, and Pittsburgh, and would be an important competitor at Washington National Airport and in the New York metropolitan area.
Approximately 80% of the combined capacity of the two airlines would be operated in twin-engine McDonnell Douglas DC-9s and Boeing 737s, deemed appropriate by analysts for the carrier’s market. The two airlines also have strong affiliations with commuter--or feeder--airlines.
But there would be some drawbacks, according to Pettee.
The most important of these is that the new carrier would lack its own computerized reservations system, a highly important factor in the current, highly competitive airline environment.
There would also be some difficulty in integrating the two labor forces. Each airline has just under 15,000 employees, but USAir has sharply higher labor costs than Piedmont. Average pay at USAir is $48,000 a year (second only to Pan American World Airways); Piedmont’s average is $33,100.
“We believe that unit operating costs are likely to increase marginally for the combined operation,” Pettee said. “While increased labor costs arising from the integration of work forces would push unit costs upwards, we believe that the paring of duplicative . . . functions and facilities are likely to offset material increases in contract labor costs.”
