TWA Offers to Buy Ailing Air Rival Pan Am
Ailing Pan Am Corp. said Sunday that its debt-ridden rival, Trans World Airlines, has offered to buy it for $450 million, in what would be a merger of two of the nation’s weakest airlines.
The proposed transaction underscores the precarious condition of some of the nation’s carriers, and might signal the start of further consolidation in the airline industry, as weak airlines look for partners for help.
A merger of TWA and Pan Am would create an airline with prized European routes--and an unenviable debt.
Such a merger would come under close government scrutiny because the airlines’ European routes overlap. Together, TWA and Pan Am control one-quarter of the trans-Atlantic market.
TWA made its offer on Friday, about two weeks after cash-starved Pan Am ended merger talks with it and sold its crown jewels--routes to London and other prestige European destinations--to United Airlines.
TWA, in its letter to Pan Am, said its offer expires Nov. 16, two days after Pan Am was expected to close its $400-million deal with United, which includes airplanes and ground facilities as well as routes. TWA said it would withdraw its offer if Pan Am didn’t cancel the United deal, a prospect that seemed unlikely Sunday.
The offer from TWA seems to raise the stakes in what is shaping up as an auction for Pan Am.
American Airlines, the nation’s biggest airline, has already tried to outbid United for Pan Am’s coveted European routes. Others, including America West Airlines, have shown interest in Pan Am’s money-making Northeast shuttle.
Two weeks ago, Pan Am was said to have turned down a merger offer from TWA Chairman Carl C. Icahn because he wouldn’t provide Pan Am with a much-needed $200-million cash infusion. TWA’s new proposal seems to address that problem.
TWA has offered to buy Pan Am in two steps. It said it would buy its Northeast shuttle by the end of the year, providing Pan Am with some cash immediately. It would then buy the rest of the company from shareholders sometime in March.
TWA said it would pay $3 a share for the airline--$1 in cash and $2 in notes or preferred stock. Pan Am’s shares closed at $1.625 on Friday, and traded as high as $4 during the last 12 months.
TWA did not say how it would obtain the money, but it has about $1 billion in cash and short-term securities that it can sell quickly, if needed, to pay for Pan Am.
Airline industry analysts said the transaction would quickly pay for itself, since Icahn could probably sell the overlapping European routes for more than he is willing to pay for Pan Am.
“He can probably get at least $500 million, and possibly as much as $700 million,” for Pan Am’s European routes, analyst Raymond Neidl of Dillon Read in New York estimated. “He can pay for the deal and pay off some of the debt too.”
Though the two airlines overlap in Western Europe, they complement each other in other overseas markets. Neidl said Pan Am is strong in Eastern Europe and South America, while TWA is bigger in southern Europe. In addition, TWA has a small, but well-developed domestic route system with a hub in St. Louis, and transcontinental routes.
Outside of Western Europe “the rest of their systems are really non-competitive,” said Neidl.
The success of such a combination, observers said, depends on whether Icahn would be willing to invest money in it.
“All this presupposes whether Icahn wants to make something of it--exploit its potential--or just let it sit around and gather dust, like the rest of the TWA system,” said Kent T. Scott, chairman of the TWA pilot union master executive council.
Icahn has come under criticism for failing to invest in TWA, which has been cutting back lately; it recently sold its Chicago-London route to American for $195 million. And, as late as June, Icahn was looking for a buyer for TWA; he even offered to help finance the sale of TWA’s domestic system to America West Airlines.
Neidl speculated that the proposed merger with Pan Am isn’t much more than a financial ploy for Icahn.
“I don’t see any reason for him to run a combined airline any differently from the way he ran TWA,” he said. “This is a good opportunity for him to make money.”
The transaction is not without a good deal of financial risk. Both airlines are losing money, and have a fleet of gas-guzzling, older aircraft. TWA’s long-term debt stands at around $2.7 billion. Pan Am has long-term debt of nearly $1 billion, and owes nearly as much to its employee pension plans.
The sudden interest in Pan Am might signal a coming shakeout in the airline industry. The recent surge in jet fuel costs is devouring profits at healthy airlines and pushing weak airlines, such as Pan Am, Eastern and even TWA, closer to the edge. Continental Airlines, for example, recently considered a bankruptcy filing before rejecting the idea.
Sniffing opportunity, healthy airlines have started circling the weak ones, looking to pick up bargains.
Many airline industry analysts believe that United got away cheaply with its $290-million bid for Pan Am’s European routes. For their part, United and Pan Am have defended the price as fair because it is part of a larger $400-million deal that includes the purchase of two Boeing 747-200 jumbo jets and some facilities in San Francisco and Washington.
Pan Am, which put itself up for sale a year ago, had no comment on TWA’s offer, but indicated that it had no desire to cancel its agreement with United.
It is unlikely that United would let Pan Am out of the deal easily. The transaction was viewed as a coup for United because it instantly made the nation’s No. 2 carrier a force in Europe, its weakest market.
“United and Pan Am have indicated that this is an ironclad, sealed and delivered agreement,” said Neidl. “I imagine there must be a big break-up penalty in there.”
