Boeing Sells Allegis 36 Jets for $2.1 Billion, Gets Notes Convertible to 15% Stake

Allegis, the parent of United Airlines, said Tuesday that it will spend $2.1 billion on 36 new Boeing airliners and at the same time sell Boeing $700 million in notes that are convertible to common stock.

Under the agreement, Boeing could eventually own as much as 15% of Allegis common stock, based on current market prices, although the full terms of the financing were not disclosed.

The unusual transaction was interpreted by analysts as a takeover defense by Allegis, which has become a potential target since United’s pilots union offered to buy United Airlines earlier this year from Allegis.

United will buy 11 new 747-400 jetliners, worth $1.5 billion, from Boeing for its Pacific fleet. The balance of the $2.1-billion order is for Boeing 737 aircraft that were covered under a previously announced sale, a Boeing spokesman said.

Boeing will provide Allegis $700 million in 7.52% convertible notes in three equal installments, beginning in May, 1990. Boeing can convert the notes to common shares at any time or to preferred shares, which are also convertible to common.

Boeing Vice President Harold Carr declined to say whether Boeing intends to convert the notes to common shares.

Allegis did not say at what price the notes could be converted into common stock, but at Tuesday’s closing price of $67.75 a share, the investment would equal around 10.3 million shares. Allegis has 55.7 million common shares outstanding.

For Boeing, the unusual transaction marks the first time the world’s largest commercial aircraft producer has taken a potential equity stake in an airline in connection with a sale.

Once Part of Same Firm

“Our business is to design, develop and sell airplanes,” Carr said. “This particular situation called for this type of package, but one shouldn’t read too much into it for the future.”

Nonetheless, Carr noted that in the 1930s, United Airlines and Boeing were a part of the same company. Aircraft producers would almost certainly be barred today from any substantial role as air carriers under federal antitrust laws.

Allegis spokesman Matt Gonring said the financing by Boeing of United’s airliner purchase is not a way of thwarting the attempt by the pilots union to buy the carrier. The pilots proposed last month to purchase the airline from Allegis for $4.5 billion, but Allegis rejected the proposal, saying it was not a valid offer.

“This not a defensive posture,” Gonring said. “This is a separate situation. It is an attractive investment to all parties involved. It provides attractive financing at low interest rates to the company and it is a good investment for Boeing.”

Allegis said the proceeds from the note sale will be used to retire the majority of the firm’s short-term, floating-rate debt.

Frederick C. Dubinsky, chief of United’s pilots union, said the pilots knew about the Boeing deal, but declined to comment.

Airline analyst David Sylvester of Montgomery Securities in San Francisco said he was “stunned that Allegis would issue any equity--be it convertible or straight--at this time, given the uncertainty of the company’s near - term ownership.”

He said it would further injure the already fragile relationship Allegis has with the UAL pilots. “It flies in the face of the pilots, who have made a good faith proposal. It will create further unhappiness among the pilots.”

He added that Boeing appears to have defeated an attempt by rival Airbus Industrie to sell United its A-340 wide - body aircraft. He said he thought that Airbus was “now out of the picture.”

Scott J. Drysdale, airline analyst in the Seattle office of the San Francisco-based brokerage house of Birr, Wilson & Co., said: “It certainly complicates the financial structure of Allegis Corp. and would tend to make any kind of takeover some degrees more difficult. Not impossible. Just more difficult,”

He said that the low interest rate that Allegis is getting from Boeing is a “competitive technique to get the order. Boeing is financing these aircraft in return for the IOU. That is a low financing cost to Allegis.”