Icahn Proposes Buyout to Take TWA Private : Would Be First Major U.S. Airline Not Publicly Held; Deal Valued at $1.2 Billion
Millionaire financier Carl C. Icahn, who already controls 73% of Trans World Airlines, said Wednesday that he plans to buy out the carrier’s other stockholders in a transaction that could be worth as much as $1.2 billion.
It would be the first time that a major American airline has been privately held. The only case that comes close was when Howard Hughes owned more than 80% of TWA during the mid-1960s.
Icahn, who is TWA’s chairman, said he would merge the airline into a newly formed company that would pay current TWA shareholders $20 in cash and a 12% “junk bond” with a face value of $20 for each share. TWA has about 30 million shares outstanding, including Icahn’s.
According to Mark Buckstein, the airline’s general counsel, the Securities and Exchange Commission must approve the proxy statement for the transaction. But no other government agencies, such as the Justice Department or the Department of Transportation, will be involved, he said.
A majority of the TWA shareholders who are not affiliated with Icahn must approve the offer. The vote will be held at TWA’s annual meeting, which was to have been Aug. 6 but now has been postponed until later in the year. TWA said Wednesday that Icahn will vote his shares the same way that the majority of unaffiliated public shareholders vote.
Would Give Flexibility
Analysts were busy Wednesday speculating on Icahn’s motives in the proposed leveraged buyout. The main reason, a number of them said, is the flexibility it will give him in operating the nation’s sixth-largest airline, which he has controlled since a bitter takeover battle two years ago. He would not have to report to the SEC and would no longer have stockholders peering over his shoulder.
“With no shareholders,” said Anthony Hatch, airline analyst with the Value Line research firm, “he can sell the whole airline or parts of it without the threat of being sued for violating his fiduciary duties to them. Assuming he is getting ready to sell the airline, this would allow him to do it faster and simpler. With Carl Icahn, nothing surprises me.”
It had been widely speculated when Icahn first bought into TWA that he intended to liquidate it.
“My guess is that he is acknowledging that there is no ready buyer for TWA,” said Hans Plickert, airline analyst with the New York brokerage house of E. F. Hutton. “If that is true, he may be uncomfortable with the public disclosure requirements for holders of just 30% of the outstanding stock. He has TWA cash flow to engage in other investments, such as the investment in USX Corp.
“He may find it bothersome to have to report these things to the public. He is also saying that the stock is worth a great deal more than what it is selling at and that he will never get full value as long as the public is worried about being a minority shareholder.”
But others said they believe that Icahn has intended to buy the entire airline all along. Edward B. Keaney, an airline analyst with the St. Louis-based brokerage house of Burns Pauli, said: “When Icahn initially bought the 73% in the airline, he was trying to buy the entire company but he had trouble getting the financing. Now the financing seems more doable. TWA’s performance has improved.”
But Wall Street appeared to be hesitant about the non-cash portion of Icahn’s offer. The stock price gained $1.875 Wednesday to close at $34.125--considerably under the $40 in cash and debt that was offered.
This could indicate that investors do not believe that they will ever get the full $20 for the 12% subordinated debenture that makes up the non-cash part of Icahn’s offer. Even if they do, they will get it in dollars likely to be worth much less 20 years from now, when the debentures come due. In addition, because the bonds are “subordinated,” the 12% interest would be paid only after TWA pays the interest on some of its other outstanding debt.
However, Robert Joedicke, airline analyst with the investment house of Shearson Lehman Bros., said it was not surprising that the price of TWA stock did not rise closer to $40. “One always discounts about 15% in order to evaluate whether the offer will go through and whether the time delay will make a difference,” he said.
TWA said the $600 million required for the cash portion of the merger will come from an $800-million private placement of TWA debt securities through Drexel Burnham Lambert, the investment bankers. Drexel has also agreed to provide $800 million in bridge financing if necessary, TWA said.
Buckstein said Drexel’s willingness to provide “such a big bridge loan,” is a sign of the investment banking firm’s confidence in its ability to sell the securities.
TWA said the extra $200 million from the financing will be used for repayment of certain TWA obligations that may mature as a result of the merger. After the deal is completed, TWA said, it will have $750 million in its treasury.
Scott Drysdale, airline analyst with the San Francisco brokerage Birr Wilson, said the large amount of available cash might prompt Icahn to attempt a takeover of another company.
“That’s a pretty hefty war chest if he wants to take a shot at someone else,” he said.
Under Icahn, TWA’s financial fortunes have greatly improved and, after two years of sizable losses, the airline is expected to return to profitability this year. This is due to a number of reasons, including scheduling changes, long-term changes in union work rules that improve productivity, increased traffic on North Atlantic routes as a result of a decline in international terrorism and a “rationalization” of TWA’s domestic route structure as a result of its takeover of Ozark Airlines late last year.
On Wednesday, TWA announced that it had a $1.97-million loss in the first half of 1987, compared to a loss of $256.58 million in the first half of last year. The company said it had a profit of $52.8 million in the second quarter of this year, compared to a loss of $87 million in the year-ago period. Buckstein said it was best second quarter in the company’s history.
