Falling Stock Puts TWA on Takeover Radar --or Does It?

Trans World Airlines Inc., crippled by a decade of red ink, is now celebrating its 75th anniversary in ignominious fashion: The stock-market value of the entire airline isn’t much more than the sticker price of a single new 747 jetliner.

The St. Louis-based airline operates a fleet of 190 jets, serves destinations on three continents and employs more than 20,000 people. Its domestic hubs are in St. Louis and New York, and it recently made Los Angeles a “focus city” where it has significantly added flights.

Nonetheless, the airline’s woes have turned TWA’s shares into a penny stock, and TWA’s total market value is now a paltry $167 million. It’s a situation so dire that it’s drawn the attention of an obscure Los Angeles investor named Emil Bernard, who runs a shell company called Global Airlines Corp. that has no operations but this week made an offer of cash and stock valued at $3.75 a share, or $298 million, for TWA.

Though industry analysts said they’re wary of Global’s offer, it prompted a modest rally Tuesday in TWA’s stock, which gained 87 cents a share, to $2.52, on the American Stock Exchange.

TWA wouldn’t discuss the Global offer specifically, but said “we are always prepared to consider any legitimate expressions of interest by credible parties.”

Regardless of whether Global’s offer makes any headway, it raises the question: At such a rock-bottom price, wouldn’t TWA--the nation’s eighth-largest carrier--appeal as a takeover target to one of the existing airlines? And wouldn’t TWA be especially attractive now, when UAL Corp.’s United Airlines already plans to buy US Airways Group Inc. and other airline mergers are expected?

Not necessarily, industry trackers said.

“You buy this company [TWA] and you buy all of its problems,” said Ray Neidl, an analyst at the investment firm ING Barings in New York.

What problems? TWA’s precarious financial condition, including a heavy debt load; the problems of integrating TWA’s senior, unionized work force into another carrier’s payroll; and TWA’s mixed bag of U.S. and foreign routes.

“TWA is stuck between two worlds,” Neidl said. “On the one hand, it’s trying to operate as a full-network carrier and as a result it has the costs of a full-network airline. On the other hand, it’s like a smaller, regional carrier like an America West, but it doesn’t have that airline’s lower costs.”

TWA’s financial condition--including its operating losses and debt burden--isn’t as severe as in years past. Between 1990 and 1995, the airline twice had to seek protection from creditors by filing for bankruptcy reorganization. Also, demand for TWA’s flights remains fairly strong: Its “load factor,” or the percentage of its available seats that were filled, was a decent 77.5% in this year’s third quarter.

But TWA still struggles at a time when the rest of the industry is enjoying prosperity. In the nine months ended Sept. 30, the airline posted a loss before one-time charges of $102.3 million on revenue of $2.7 billion. The company also had a negative net worth--meaning its debts outweighed its assets--of $281 million, and it had only $157 million of cash on hand.

Its stock price reflects investors’ frustration with TWA’s repeated attempts to turn a profit with new initiatives, only to see those efforts fail. Even this summer, when TWA beat out United and other airlines to win the right for new nonstop service between Los Angeles and Ronald Reagan National Airport in Washington, TWA’s stock was unaffected.

Still, TWA has some attractive assets and it’s been in exploratory talks with a handful of airlines about a merger. US Airways and Continental Airlines are among those that have mulled over the idea, according to industry sources, and AirTran Holdings Inc.--a regional carrier formerly called ValuJet Airlines--publicly announced in June that it had held early merger talks with TWA but had ended them.

A buyout of TWA “is conceivable,” said Brian Harris, an analyst with Salomon Smith Barney in New York. TWA’s St. Louis hub “is a strategic asset” because of its central location in the United States, and because “St. Louis is rich with business traffic.”

But Harris added that “there is a lot of debt” at TWA, and that although TWA’s labor contracts remain “under the industry average,” the “seniority of its work force” is a problem because any airline buying TWA would have to absorb those higher-paid employees without alienating its existing workers--always a tough task in the airline business.

As for Global Airlines, the company issued a news release saying it would offer $2.25 worth of nonvoting stock and $1.50 cash for each TWA share. Global also said there would be no layoffs of TWA workers, but it would require TWA’s chief executive, William Compton, and TWA’s directors to resign.

John Scott, a spokesman for Global Airlines in New York, said this is Bernard’s third bid this year to buy TWA, and that TWA hasn’t yet responded to the latest proposal. This time, though, he said Bernard is prepared to launch a tender offer directly to TWA’s stockholders if TWA’s board doesn’t accept his bid.

Bernard “wants to build a major global carrier, and he wanted to start with something that had a little substance rather” than starting an airline from scratch, Scott said. He said Global has been in talks with government regulators about getting an operating certificate, and has the buyout financing in place. Bernard is declining interview requests, he added.

Scott also said Bernard is the same investor who unsuccessfully tried in 1978 to buy the San Francisco Giants baseball team and move it to Washington.

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TWA’s Turmoil

Trans World Airlines’ persistent losses have turned its shares into a penny stock, thus drawing at least one buyout offer. Here are its recent quarterly losses:

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Quarterly net loss, in millions

Third quarter 2000: -$35 million

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Sources: Trans World Airlines, Bloomberg News