KLM Asked to Cut Stake in Northwest : U.S. Move Could Affect British Role in UAL Sale
The Department of Transportation has told the owners of Northwest Airlines that it wants KLM Royal Dutch Airlines to reduce its investment in the airline, according to a source close to the situation.
The action by the DOT could affect future airline mergers, particularly the pending buyout of UAL Corp., the parent of United Airlines. UAL is being acquired by an employee group with the help of a $750-million investment by British Airways. When the transaction is completed, British Air will own 15% of United.
The department has the power to force the airlines to reduce the amount invested by foreigners.
Transportation Secretary Samuel K. Skinner told Los Angeles investor Alfred A. Checchi last Friday that he wants KLM to reduce its investment in Northwest to $175 million from $400 million, the source said. Skinner also wants KLM to give up its seat on the Northwest board. KLM helped Checchi acquire Northwest for $4.05 billion in June.
Checchi could not be reached for comment Monday.
5% Stake
Skinner and other DOT officials have expressed concern about the amount of debt and foreign investment involved in recent airline takeovers.
Federal rules allow foreigners to acquire up to 25% of a U.S. airline. However, the federal officials have said they are concerned that a foreign owner can exert too much influence on a U.S. airline even though it owns less than one-quarter of its stock.
KLM received just a 5% stake in Northwest, even though it contributed the bulk of the $700-million equity investment needed to buy the Eagan, Minn.-based airline. For most of its investment, KLM received non-voting preferred stock.
The DOT’s action is not expected to hamper Checchi’s plans for Northwest because he is expected to be able to find other investors. On Monday, Gerald Rosenfeld, head of merchant banking at Bankers Trust, said the New York bank might increase its $80-million investment in Northwest.
Investment analysts said the regulators’ attitude toward foreign investment could have a greater impact on the $6.75-billion buyout of UAL Corp. The $300-a-share tender offer began last Thursday.
There were indications that the DOT is moving swiftly to examine the UAL transaction. The department Monday released an eight-page letter to UAL Chairman and Chief Executive Stephen M. Wolf seeking information about the buyout. The department gave Wolf until Oct. 10 to explain the relationship between British Air and United and to provide financial statements and projections.
UAL’s shares slid $7.125 to $274 Monday on the New York Stock Exchange, as investors feared that British Air might be told to reduce its stake.
Although United’s buyers could find another investor, the presence of another partner might upset the delicate partnership between United’s pilots and its management, who will end up owning 85% of the company.
