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.

Beyond its rehabilitated fiscal reputation, the company also boasts enviable assets. Two weeks ago, Northwest announced a clever plan whereby it shifted a $758 million Japanese mortgage into a different form of ownership, allowing it to be accounted for as "minority interest in an affiliate." In so doing, it wiped $758 million worth of debt off its balance sheet. NWA management then announced they would use $537 million in cash and $300 million from a new unsecured bank loan to pay off $837 million worth of debt.

This chunk of old debt is the last portion of the original financing used to buy Northwest through a $3.65 billion buyout in 1989--which means new freedom for the Checchi/Wilson regime. Until now, most of the airline's chief assets were committed as collateral to the leveraged buyout financing; they included Northwest's prized Pacific routes, currently listed with a book value of about $4.7 billion and a market value of about $6 billion, according to news reports and inside sources who attended a recent Northwest presentation at Salomon Brothers Inc.

That means, in theory, that Northwest could re-leverage those assets into a financing deal that would allow it to buy another airline. Or it could sell off the assets to the highest bidder. Industry analysts say, for example, that American Airlines would be willing to pay much more than book value to buy Northwest's Pacific routes. In yet another scenario, some unknown suitor could come along and put Northwest through another leveraged buyout by using its assets to help finance a purchase.

As for rumors about Northwest selling the Pacific routes separately, the company breaks from its usual "no comment" posture. "The rumors are absolutely false," says Austin, "and anybody who would say that has no understanding of the company or its strategy."

Meanwhile, the industry is rife with speculation over who may be looking to buy whom. United Airlines made a serious run at picking up USAir until talks broke down two weeks ago. That possibility sent several other airlines into strategic planning meetings, searching for their own possible merger partner to combat what would have become the world's largest airline.

As Beyer points out, a deal between Northwest and American would be even bigger. But she and all the other people contacted for this story say they don't know what Northwest may be planning at this point.

Adding to the mystery is Northwest's unique position in the industry. "The people who have the ability to buy other airlines are United, Delta, and American. Then there's the other group, those carriers such as Continental, USAir, and TWA that are in the area of likely being acquired," says Dan Aikens, vice president of the aviation consulting firm Airtrans Inc. "Northwest is in the middle and can go either way."

The hottest bet on the street is that Northwest will be acquired by American, or become part of a new parent company that merges Northwest with Continental or Delta. But there are several potential variations:

§ American and Northwest

"The best merger would undoubtedly be between Northwest and American," said BDS's Paul Davner, echoing several other industry observers. "In one fell swoop, American would get a European ally through KLM and the largest bloc of U.S.-Japan routes."

Northwest and United own most of the routes between the United States and Japan/Asia. The Pacific routes give Northwest great strategic value because of their profitability relative to domestic and Atlantic routes. At the same time, Northwest isn't taking full advantage of its route authorities; it has more than a dozen routes into Japan that it cannot afford to use at present, and industry observers say the company is continuing to lose ground to United when it comes to Pacific market performance. American, through buying Northwest, could finally compete with United on a level playing field.

Others disagree. "Anybody who thinks that's possible has too much time on his hands," says IAM official Vince Bazzachini. "The two have been arch enemies for a while now. I also think the government would take a serious look at a merger of that size before allowing it."

"With its cost structure, I don't think American is anywhere near positioned to go after and acquire Northwest," says a former high-ranking Northwest executive. "[American Airlines CEO Robert] Crandall may just be so charged up that Northwest would look like the deal to do. But Northwest's pilots are under a different union than American's, and that would be tough to deal with."

He also echoes a point raised by other observers: "Could you imagine Crandall and Checchi and Wilson trying to negotiate?" Both sides have been publicly open about their disrespect for each other. "On paper, American and Northwest would make sense. But look at the egos involved and the labor issues."

But at least one Northwest pilot thinks the labor issues could actually be a benefit. "Our pilots would jump at the chance to switch to an independent pilots union," he said. "If American's and Northwest's pilots got together and had an election, that's what would happen."

§ Northwest and Continental

A merger between Northwest and Continental "is what the boys are fighting KLM over," claims the former Northwest executive. "They could probably combine the two carriers and create an even greater value for their stock. Whether your stock is $45 a share or $55 a share makes all the difference when you go to sell millions of shares."

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