$7-Billion Bid by Trump for American Airlines
New York real estate and gambling magnate Donald J. Trump bid more than $7 billion Thursday for AMR Corp., parent of giant American Airlines, in what would be the largest airline deal in history.
Trump’s “unsolicited” offer of $120 in cash for each of AMR’s nearly 60 million shares outstanding was viewed by some analysts as being too low a price for the airline, which is widely considered to be the industry’s best managed and whose 19% market share is the largest among U.S. air carriers.
American is the leading airline serving Orange County, flying 35% of the daily flights to and from John Wayne Airport.
A statement issued by AMR said that its board of directors would consider the offer “in due course” but indicated that it was likely to reject it.
The flamboyant billionaire gave no details about how he would finance the deal but said he is prepared to commit at least $1 billion of his own money to the transaction.
It is known that Dallas-based American has about $1 billion in cash in its treasury that could be used by Trump to help finance the deal. Moreover, American has been trying to sell half of its highly profitable Sabre computerized reservation system, for which it could receive $700 million to $1 billion, and that money also would be available to Trump.
But, whether or not Trump, who also owns what was once Eastern Airlines’ lucrative Northeast air shuttle operation serving Washington, Boston and New York, is serious in his bid to take over American, he has put the big airline company “into play,” Wall Street analysts said Thursday. Some said that Trump may just be trying to drive up the price of the stock so he can sell his shares at a large profit.
Airline analysts maintained in interviews that American is worth at least $130 a share and that, if a bidding war occurs, it might fetch $140 a share, which would make the deal worth about $8 billion. They predicted that similar bids soon will be made for Delta Air Lines and USAir Group, even though both have recently taken steps to protect themselves against takeovers.
But Wall Street did not appear to have taken the Trump offer all that seriously. Although AMR stock was the day’s most heavily traded on the New York Stock Exchange, with 8,359,800 shares changing hands, the price per share was up only $16.875, closing at $99.875--far below Trump’s bid price.
Financing Details Needed
“All we have is a letter,” said Thomas C. Longman, airline analyst with Bear, Stearns & Co., a New York broker. “At this point, we have to get the details of Trump’s financing plans to see how serious an offer this is.”
Trump said in a letter to AMR’s board of directors that he would be able to obtain the financing “in a reasonable period of time.”
Louis Marckesano, airline analyst with the Philadelphia brokerage firm of Janney Montgomery Scott, said: “If anyone would be able to finance such a deal, Trump would have the wherewithal. But we are not talking small change like what he paid for the shuttle ($365 million).”
The Trump offer, which has been rumored since it became known several weeks ago that the financier had bought an interest in AMR, comes at a time when federal regulators are expressing concern about the heavy debt loads taken on by U.S. airlines in recent purchases.
NWA Corp., parent of Northwest Airlines, was recently bought for $4.05 billion by a group of investors headed by Los Angeles financier Alfred A. Checchi. A $6.75-billion management-employee offer for UAL Corp., parent of United Airlines, is currently under consideration. These so-called leveraged buyouts are new to the airline industry, which in the previous five years had seen a frenzy of airline mergers.
May Have White Knight
As AMR watched the NWA and UAL transactions, Marckesano said, it most probably prepared itself to fend off an unfriendly bid. “They might have a white knight, somebody who has said to (AMR Chairman Robert L.) Crandall: ‘Let me know if you need any help.’ ”
Marckesano said that, as another defensive measure, AMR could make a bid for Pan Am Corp., or let Pan Am make a bid for AMR “so as to take on a great amount of debt.” Such debt would make AMR much less attractive as a takeover target. American now has one of the best balance sheets in the airline industry, with only 37% debt to total capitalization.
American said in a terse announcement after receiving Trump’s offer that “there has been no change . . . in the policy and belief” that AMR and its shareholders will be best served by AMR’s remaining an independent company and “continuing the strong partnership among American Airlines, its employees, the communities it serves and the public--a partnership that has given AMR the great success it enjoys today.”
The company has had healthy profits. In the six months that ended on June 30, its net earnings rose to $278.9 million from $209.8 million during the same period last year. Total revenues rose to $5.17 billion in the first six months of 1989 from $4.13 billion in the same period of 1988.
Has Ordered New Planes
In the last 2 1/2 years, AMR has placed orders and options for more than $23 billion worth of airliners for American Airlines and for American Eagle, its commuter subsidiary.
In his letter to the AMR board, Trump said his offer to buy the company will expire on Oct. 20 unless he extends it.
Trump said it is his intention to acquire AMR in a “negotiated transaction. In this regard, my proposal is subject to the execution of a mutually satisfactory definitive acquisition agreement.”
He said also, “In recognition of the outstanding job done by company management, I would hope that, following an acquisition of the company by me, operating management would continue to work with me to build on the company’s reputation as the premier airline in the industry.”
But it is questionable whether the American management team would remain under Trump. According to Kevin C. Murphy, airline analyst with Morgan Stanley & Co., another big broker, AMR has termination benefit agreements with nine top executive officers. Crandall has been given options on 355,000 shares of stock worth $46 million, assuming the stock is valued at $130 a share.
An Appeal and a Threat
The Trump letter contained both an appeal to stockholders and a veiled threat to management.
“While I share your vision of the future for the airline,” he said, “and I admire the values that have been created for the company’s shareholders, I believe that the shareholders of the company should be given an opportunity to decide whether now is an appropriate time to realize those values.”
He added: “While I appreciate that the seemingly patterned response to letters such as this is one of immediate rejection and vilification of the author, I ask you, can such a response genuinely be in the interests of the company’s shareholders who, as you are aware, have received no dividends on their shares for many years?”
Analysts noted that the company considers itself to be a capital-intensive firm and prefers to reinvest its profits in assets such as new airliners rather than paying them out in dividends.
But, despite AMR’s expression of its intention to remain independent, it is not altogether out of the question that some kind of compromise could be worked out, some analysts said.
“I would not call this a hostile bid,” said Timothy Pettee, airline analyst with Merrill Lynch, Pierce, Fenner & Smith, a New York-based broker. “Of course, it is unwanted, but that does not preclude a friendly agreement.”
Pettee said Crandall and Trump probably would not get along well together.
“Crandall is not used to reporting to anybody,” he said. “But Trump is an investor, not a manager.”
He added that Trump, who named the Eastern shuttle after himself when he acquired it in June, would not be likely to do that with American. “The Plaza (Hotel in New York) had a name, and he was smart enough not to rename that.”
