Pension fund ups the ante in bid for US Airways stake

It offers $240 million, topping Texas Pacific

September 20, 2002|By Paul Adams | Paul Adams,SUN STAFF

The price for virtual control of a restructured US Airways will likely go higher, now that Alabama's public-employee pension fund has sparked a bidding war with Texas Pacific Group for a 37.5 percent stake in the bankrupt airline.

In a letter to US Airways chief executive David N. Siegel, the Retirement System of Alabama offered $240 million in financing for the seventh-largest airline, beating Texas Pacific's offer of $200 million by 20 percent.

The pension fund's bid will be filed with the federal bankruptcy court in Alexandria, Va., which is overseeing the airline's restructuring. It filed for bankruptcy protection Aug. 11.

The pension fund's move starts a 60-day due-diligence period during which others may bid for a stake in US Airways, the third-biggest carrier at Baltimore-Washington International Airport.

Bankruptcy experts say it's possible that other parties will join the fray, and many expect Texas Pacific to counter the pension fund's bid.

"It's very common to have bidders and very common to have not just two but multiple bidders," said Lynn M. LoPucki, a University of California, Los Angeles Law School professor who follows major bankruptcies.

"The trick is to get the bidding started," he said. "Once you get it going, that's very much to the benefit of the company."

The Alabama pension fund is led by the outspoken David Bronner, whose risky investments have paid dividends during his nearly 30 years in the post. The fund's assets have grown from $500 million when Bronner took over in 1973 to $25 billion today. Included in its investments is $340 million in US Airways' debt. The airline used the money to buy airplanes.

"We are the guys that bought New York City bonds when everybody said New York was going broke," Bronner said. "We've done this before."

Bronner said US Airways is likely to emerge from bankruptcy a much stronger airline as a result of recent pay concessions from its labor groups and other cost-cutting measures.

He dismissed concerns about a state government fund's taking such a large stake in an airline when the industry is reeling from a faltering economy and last year's terrorist attacks.

"It's not risky at all compared to lots of other things, like the stock market right now," Bronner said.

Texas Pacific declined to comment yesterday. US Airways officials acknowledged receiving the Retirement System of Alabama's letter but declined to comment further.

Texas Pacific, a private equity firm headed by David Bonderman, pledged to provide $200 million in debtor-in-possession financing as part of US Airways' chapter 11 bankruptcy filing. Analysts speculated at the time that other bidders would come forward.

The first bidder in a bankruptcy proceeding is often referred to as the "stalking horse," LoPucki said.

As is common among first bidders, Texas Pacific negotiated a break-up fee of $7 million, about 3.5 percent of the financing offered.

"The first bidder insists on a break-up fee because they know their offer is going to be shopped to other people," he said. Bronner said the pension fund's bid contains no such fees, making it a better deal for stockholders and employees of US Airways.

Despite US Airways' considerable financial challenges, analysts said, the winning investor could walk away with a sizable profit if the airline survives. Three years from now, the airline could be worth $2 billion to $3 billion, some analysts said. A 37.5 percent stake would be worth several multiples of the original investment of $240 million proposed by the Alabama pension fund.

"That's why these guys are willing to risk this kind of money," said Jon Ash, managing director of Global Aviation Associates, a Washington consulting firm.

"That does presuppose you're going to have a reasonably good market three years down the road. That's a big if."

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