Let's Make a Deal

A newly rehabilitated--and temporarily stabilized--Northwest Airlines is poising itself for the next round of industry mergers and acquisitions.

Al Checchi and Gary Wilson--the "Fly Boys" who bought Eagan-based Northwest Airlines in 1989 and nearly ran it into the ground, earning themselves titles such as "Barbarians at Gate 31" from local media--are back in the news. This time, though, they are likely to be painted as savvy investors whose hard work and determination will net more than $1 billion in profits for themselves and those who invested with them.

Northwest is being dressed for sale. And Checchi and Wilson have just jockeyed their way into the catbird seat, tossing out the only element that could have stood in the way of making a clever deal--longtime partner KLM Royal Dutch Airlines.

Or so goes the perception in the industry. Of course, Northwest's formal response to whether it is discussing a possible sale or merger is always the same: "We don't comment on rumors." And the company naturally describes its battle with KLM very differently.

But recent moves by Northwest's board and top management--as well as the company's financial position and the condition of the industry generally--have led a number of Northwest employees, former executives, and industry analysts to believe that management is prepping the company to fetch an attractive price as the industry enters its next round of consolidations in the coming year.

"Many of us believe Northwest has been operated for about the last 12 months as though it's being prepared for sale," says a senior Northwest pilot active in company affairs, adding that the most likely suitor is American Airlines. NWA, he points out, "has done little by way of capital expenditures; market opportunities, especially in the cargo area, have been let go; and no plans are being made to replace our older Boeing 747s, even though we frequently can't carry a full load of passengers across the Pacific because of fuel capacity constraints."

"What we've been doing," counters Northwest representative Jon Austin, "is simply trying to operate efficiently and profitably. The last nine consecutive profitable quarters indicate we've had some success at that."

Vince Bazzachini, the president of Local 1833 of the International Association of Machinists (IAM), says he doesn't believe management is actively trying to sell the company. "But I do believe there's a backup plan that has been prepared in the event there is another round of industry mergers," he says. "Is there a plan B [to be acquired]? Sure there is."

In essence, Northwest's position seems to be that "if we're going to go up for grabs, we have to do some things to make sure we're well positioned to take advantage of it," says Barbara Beyer, president of the Arlington, Virginia-based airline consulting firm Avmark Inc. "Northwest set up a poison pill, has cleaned up its act financially, has a solid domestic route system, has the Pacific routes, and has a good relationship--despite the recent conflicts--with KLM. Those things make it an attractive buy."

The matter of who has the power to decide Northwest's course has been the subject of intense infighting and legal maneuvering between KLM and NWA. In recent weeks, the struggle has spilled into the courtroom, where KLM is trying to reverse the actions of Northwest's board of directors. At issue are certain rights granted to KLM when it agreed to help the airline out financially in 1989 and again in 1992-93.

According to Austin, Northwest has no secret agenda: "The company's management and board is doing what it thinks is in the best interest of the company, its employees, and its shareholders."

Others say it's doing only what's best for Checchi and Wilson. "KLM was the only one that controlled Checchi and Wilson," counters one industry official with ties to Northwest's upper management. "Those two now have $6 billion in market-valued assets to play with, and KLM keeps them from doing things that are not in the interest of either airline."

By way of illustration, the airline official points out some interesting details surrounding Northwest's recent adoption of a "poison pill" shareholders' rights plan.

Northwest accused KLM of trying to slowly buy a large enough position in Northwest to take control of it. Such a claim seems absurd given that U.S. laws prevent foreign ownership from exceeding 25 percent of a carrier's voting stock and 49 percent of its overall equity; KLM owns around 20 percent of Northwest's voting stock and was hoping to acquire up to an additional 4 percent. It had no plans to go any further, KLM company officials claim.

But laws can be changed, cautions Austin. "As it's prudent to put a lock on your door even though the police are out there protecting you," he says, "it's prudent to change the bylaws even though laws are out there."

Austin also says that Northwest officials discovered a KLM representative had requested that the U.S. law be changed. He wouldn't elaborate, except to say that "It was at a level sufficient to provoke our extreme concerns." KLM denies the claim. And the industry insider notes that Checchi and Wilson--who boast ties to the leadership of both major parties and to officials of the Department of Transportation--have more political clout than their counterparts at KLM.

Northwest's board nonetheless used concern over KLM's potential encroachment to justify amending an agreement that was formed in 1989 between the original six investors who financed Northwest's leveraged takeover: KLM, Checchi, Wilson, investor Richard Blum (the husband of U.S. Senator Dianne Feinstein, D-California); longtime Republican insider Fred Malek; and the New York-based Bankers Trust Co. These six had agreed in 1989 that if any one of them, or a combination of them, wound up owning 40 percent of the holdings that the original shareholders had started out with, that investor--or a combination of them--could block the board of directors on major corporate transactions, such as mergers or sales of Northwest assets. Bankers Trust recently sold off 4.2 million shares, leaving only two entities with enough stock to block a major board-approved transaction: the Checchi/Wilson team and KLM.

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