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.

The recent amendment does away with all that by eliminating the 40 percent blocking rights. It also kills an agreement whereby KLM was to be given first right of refusal on any stock sold by the original shareholders. And as if those moves weren't enough, there's the poison pill. Northwest's pill protects the company from an unwanted party buying more than 19 percent of its stock (and restates KLM's ownership at 18.8 percent on a fully distributed, fully diluted basis).

In getting rid of KLM's veto power and freezing its ownership position, the board no longer faces the threat of any outside interference, "especially from KLM," Northwest has stated.

One question remains: Without KLM's influence, who will counterbalance the influence held by Checchi and Wilson?

Four of Northwest's 14 board members (Malek, Blum, a director of Blum's firm named Thomas Kempner, and Northwest President and CEO John Dasburg) are close allies of Checchi and Wilson and would very likely vote as dictated by them. Two others, including Bankers Trust's George Vojta, also are likely to vote in accord with Checchi and Wilson's wishes. That's more than 50 percent of the board poised to go along with them.

Of the six other directors, three are union representatives. All of Northwest's union contracts come up for renegotiation in 1996 when a three-year-old concessions deal expires, and employees are supposed to have wages restored to 1993 levels. As the unions face a new round of negotiations with management, there could be pressure for a quid pro quo in the form of solidarity with Checchi and Wilson on board votes.

The recent board moves are bad news not only for KLM but for anybody who might argue that a company's shareholders are best served by a diverse group of directors. But put yourself on the other side of the table, says Avmark's Beyer: "If you're Checchi and Wilson, would you want KLM to have the first right of refusal on your stock when somebody like American comes along and says it's interested in buying it?"

Despite the company's refusal to comment on rumors that it will be up for sale, there are considerable advantages to the present managerial regime in following that course as opposed to pursuing its other options: carrying on independently or trying to leverage the purchase of another carrier.

In 1989, Checchi, Wilson and partner Fred Malek invested $42 million to buy 44 percent of the voting stock in Northwest at the time of its takeover. Today, Checchi and Wilson own about 20 percent, or roughly 23 million shares. Should Northwest be sold anytime soon, the two would clear a profit of $1.1 billion (including the $100 million they already made), based on its current trading price. Not bad for a seven-year investment.

Then there are the stock options, which allow managers who receive them to buy stock at below-market prices during a certain period of time.

A look at Northwest's 1995 proxy statement suggests that if the airline were acquired at its recent high-range trading price of about $46.50 a share, John Dasburg, Northwest's president, could make a profit of about $26 million by exercising all the options he held as of December 31, 1994. Michael Levine, the executive vice president in charge of the airline's marketing and international operations, would make $11 million (a figure that includes redemption of 45,000 shares he already owns). Levine has a little added incentive: According to the proxy statement, he will receive $1 million if the company is sold and he resigns as a result before July 1, 1998.

The power struggle between KLM and the Checchi/Wilson team comes at a time when Northwest is sitting in its best financial position since before the 1989 leveraged buyout.

Indeed, it was only a few years ago that Northwest was on the verge of going bankrupt. In December 1991 NWA management bullied the state of Minnesota into giving the airline a $280 million bailout loan to keep things going until December 1992, when it was able to get suppliers, lenders, and shareholders to allow the company to refinance. As part of that refinancing, KLM agreed to write off its entire original $400 million investment in Northwest and to defer dividend payments on its preferred stock, and contributed $50 million to a $250 million emergency loan to keep Northwest out of bankruptcy court.

At the same time, Northwest was allowed by its bankers to defer debt payments of $337 million for another year. And it saved an estimated $3.7 billion in future costs by killing its fleet modernization plan, opting instead to keep the oldest assemblage of planes of all the major U.S. carriers in the air despite their fuel inefficiencies.

The moves paid off. Six months later the company's unions agreed to $886 million in concessions over three years in exchange for stock. Fuel prices dropped and Northwest's competitors started suffering due to competition with lower-fare airlines such as Southwest--a factor Northwest has not yet had to face in its Detroit and Minneapolis hubs.

"I think Northwest is the best-managed airline in the business today. Their relationship with labor is without parallel," says Paul Davner, an airline industry analyst with BDS Securities in New York. Three years ago he doubted Northwest's chances, but today, he says, "Their marketing strategy is the envy of the industry. And their financial position is solid."

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