Continental Accepts $450-Million Buyout Bid : Airlines: The offer by Air Canada and Texas-based Air Partners is expected to allow the beleaguered carrier to emerge from bankruptcy court early next year.
In a deal that would unite two struggling carriers, Continental Airlines on Monday accepted a $450-million offer from Air Canada and other investors that is expected to allow the U.S. carrier to emerge from a long stay in bankruptcy court.
The partnership between the U.S. and Canadian carriers, which is subject to court and government approval, continues a trend toward international airline alliances. Both airlines left the door open to future partnerships with carriers of other countries.
“This is the first of several possible alliances that will enable Continental to establish its global presence in the future,” said Robert R. Ferguson III, Continental’s vice chairman and chief executive officer, in a statement.
The two airlines share a troubled past. Montreal-based Air Canada and Houston-based Continental have both lost millions in recent years as the recession and intense competition have pounded airlines in both nations. In addition, each carrier has sought mergers with domestic and foreign partners to carry them out of the tough times. Hollis L. Harris, president of Air Canada, was ousted as the head of Continental last year.
Those shared weaknesses may not make for the strongest of international alliances now being forged by carriers around the globe, industry analysts say.
“When you match two carriers that are financially weak in an environment that is at best slow growing, then it’s difficult to predict the outcome. Nothing is really assured,” said Jon F. Ash, managing director of Global Aviation Associates, a Washington, D.C.-based aviation industry consulting firm.
Under the deal, Continental will receive a total of $450 million from Air Canada and Air Partners, an investment group based in Ft. Worth, and led by David Bonderman and James Coulter. Continental will get the cash when it emerges from Chapter 11 federal bankruptcy court protection, a move that is expected early next year. The nation’s fifth-largest carrier re-emerged from a previous bankruptcy in 1986.
In return, Air Canada and Air Partners will each receive 27.5% of Continental’s new common stock in addition to bonds. Continental’s unsecured creditors will receive a 35.6% stake in the reorganized company.
Air Canada would also receive 24% of voting stock. Air Partners would hold 41%.
The plan is designed to comply with U.S. restrictions that prohibit foreigners from owning more than 49% of a domestic airline’s stock and 25% of voting shares.
Foreign ownership of domestic airlines has become a hot topic, with the proposed alliance between British Airways and USAir becoming an issue in the presidential campaign. While USAir seeks a partnership with British Airways, Northwest Airlines is looking to broaden its relationship with KLM Royal Dutch Airlines, which owns nearly 50% of the Minneapolis-based carrier.
Several foreign carriers came forward when Continental went on the auction block earlier this year. The Air Canada offer beat out a rival bid by a group that included Aero Mexico. Lufthansa of Germany also made an initial bid before dropping out.
Continental is familiar with foreign owners and partners. In 1990, Scandinavian Airlines Systems--owners of SAS Airlines--purchased nearly 20% of the carrier, and both airlines have cooperated on flights at Continental’s Newark, N.J., hub.
Air Canada and Continental, while remaining separate airlines, plan to mesh their systems at airports in Newark and Houston, where Continental has hubs. Continental has a large route network across the Sun Belt, a popular destination for Canadian travelers.
“They can both feed each other passenger traffic,” said David Pizzimenti, an airline industry analyst at Nomura Research Institute.
One Airline’s Bankruptcy Struggle
The following is a chronology of events that led to Continental Airlines’ agreement Monday to be purchased by Air Canada-Air Partners for $450 million:
Dec. 3, 1990: Continental Airlines files Chapter 11 bankruptcy, citing a highly leveraged debt structure and jet fuel cost increases as a result of the Persian Gulf War. It is the second Chapter 11 filing for the carrier in seven years.
Jan. 18, 1991: Continental’s sister carrier, Eastern Air Lines, ceases operations, giving Continental a boost in traffic and some assets for little cost.
Aug. 20, 1991: Continental decides to cut staff by 600, deactivate 22 aircraft and suspend 137 daily flights, primarily involving commuter craft.
Sept. 6, 1991: Continental takes steps to bring non-aircraft related savings to $200 million, eliminating 890 positions and cutting executive pay.
Nov. 15, 1991: USAir agrees to purchase a portion of Continental’s operations at New York’s LaGuardia Airport for $61 million.
Dec. 12, 1991: Continental and Trans World Airlines hold preliminary merger discussions.
Feb. 6, 1992: Continental files first Chapter 11 reorganization plan, which would swap $4.3 billion in pre-petition claims from unsecured creditors for stock in a reorganized airline and cut Continental’s long-term debt to $1.7 billion from $5.8 billion. The plan would make Continental’s current common and preferred stock worthless and allow the airline to emerge from bankruptcy as an independent carrier without an outside investor.
March 10, 1992: Continental announces addition of 71 daily domestic and international flights and plans to hire “several hundred” new workers to support them.
March 16-17, 1992: Published reports say an investor group led by Maxxam Inc. Chairman Charles Hurwitz is close to agreeing to buy a majority stake in Continental. The airline reportedly is talking to several possible investors, including the Ft. Worth, Tex.-based Bass brothers, the Dallas-based Perot group, Los Angeles investor Marvin Davis and the Chicago-based Pritzker family.
March 20, 1992: The American Stock Exchange suspends trading of Continental common stock at Continental’s request. Continental said investors were buying the shares without realizing that they would be worthless under the airline’s reorganization plan.
June 9, 1992: Continental files antitrust lawsuit against American Airlines, accusing it of creating pricing programs designed to drive financially weaker competitors out of business.
June 16, 1992: Published reports add Air Canada and British Airways to the list of companies considering possible investment offers for Continental.
June 23, 1992: Continental cuts employee wages an average of 10% to save $108 million annually.
July 8, 1992: Maxxam Chairman Hurwitz makes $350-million offer for controlling interest in Continental.
Aug. 6, 1992: Houston Air, led by Alfred Brener, offers $385 million for Continental.
Aug. 27, 1992: Air Canada and Air Partners, led by Ft. Worth, Tex., investors James Coulter and David Bonderman, make $400-million offer for Continental. The carrier also settles more than $935 million in pension and tax claims with government agencies.
Sept. 16, 1992: Lufthansa German Airlines and Marvin Davis offer $400 million for Continental.
Oct. 5, 1992: Aeromexico joins Hurwitz group bidding for Continental; Air Canada-Air Partners increases its bid to $425 million, and Northwest and Mexicana airlines join Brener group bid as non-equity advisers. The bankruptcy court agrees to Continental’s request for a Nov. 2 deadline for final offers, with selection of winner to be announced Nov. 9.
Nov. 2, 1992: Air Canada-Air Partners and Hurwitz group make final offers for Continental before court-set deadline. The Lufthansa-Marvin Davis team and Houston Air do not submit final bids before the deadline.
Nov. 9, 1992: Continental announces selection of Air Canada-Air Partners’ $450-million bid.
Source: Bloomberg Business News