Death Knell for the Megadeal? - $6.75-Billion Buyout Offer for UAL Unravels as Financing Dries Up

The $6.75-billion buyout of UAL Corp., the parent of United Airlines, unraveled Friday when the group led by the airline’s pilots and Chairman Stephen M. Wolf said it couldn’t raise enough money to finance the deal.

The collapse sent the stock market into a tailspin, pushing the Dow Jones industrial average down a stunning 190.58 points, and threw a cloud over billionaire Donald J. Trump’s bid for the parent of American Airlines. UAL Corp. shares slid $5.50 to $279.50 before trading in the stock was halted.

The Wolf group blamed unspecified “adverse changes in the market” for the sudden collapse and said it would try to revise the offer. Market sources said they expect the Wolf group to lower its bid to about $280 from $300 a share. The tender offer for the shares expires Oct. 26.

The UAL deal would have created the nation’s largest employee-owned company. The transaction would have given a 75% stake to United’s employees and a 10% stake to the airline’s other top managers, including Wolf. British Airways, which pledged $750 million to help buy the airline, would have received a 15% stake.

A British Airways spokesman in New York said the problems with financing were a complete surprise. “We are still confident the bid can be put together and the financing raised,” spokesman John Lampl said. British Airways shareholders had approved the UAL investment at a special meeting Friday in London, before the collapse of the deal became known.

The failure of the Wolf bid raises the possibility of a new offer for the airline from Los Angeles billionaire Marvin Davis, who triggered a takeover struggle for the company with a $240-a-share bid in August. Davis had said that he might pay $300 a share for the airline if the Wolf group’s bid fell through. Davis was said to be studying the situation Friday and was not available for comment.

Wolf was also unavailable for comment Friday. He was said to be in Europe with John Pope, UAL’s chief financial officer, in an attempt to raise money for the deal.

Rick Dubinsky, leader of United’s pilots, said in a statement that the deal fell apart due to a problem in the financial markets. “Anyone else trying to raise money to buy United would face the same problem,” he said. Of United’s three unions, only the pilots support the transaction.

Dubinsky said members of the buyout group expected to meet immediately with its advisers to revise the offer and financing structure.

The deal unraveled early Friday when the Wolf group’s two lead banks, Citibank and Chase Manhattan, failed to raise $4.2 billion from other banks to finance the transaction. Some of the nation’s largest lenders, such as Bankers Trust and Security Pacific, decided to stay out of the deal, while other banks agreed to contribute only small amounts. One sign of reluctance is that Bank of America’s credit committee started its loan review Thursday--the deadline for participation set by Citibank and Chase.

In addition, Japanese banks, which enthusiastically supported the earlier buyout of Northwest Airlines, were reluctant to back the United transaction, especially when there was so little support for the deal in this country.

Chase and Citibank had together pledged $3 billion to finance the transaction.

The reluctance of the banks was significant because there were some financial incentives for banks to participate in the transaction. The bank loans were to be used to fund an employee stock ownership plan, or ESOP, which has a number of advantages for banks. For example, a lender can deduct from its taxes half the interest income received on an ESOP loan.

But there were some powerful reasons, unrelated to conditions in the financial markets, why the banks weren’t enthusiastic about the buyout, according to sources familiar with the situation. The deal didn’t have broad support from United’s employees, and one union group, the International Assn. of Machinists, actively opposed it. The machinists said the deal would place too much debt on United and vowed to take steps other steps to derail it, including a possible strike.

“We were doubtful they could find the financing, and obviously, that is the case,” said Brian Freeman, an adviser to the machinists’ union. He said the company’s cash-flow projections were unrealistic and that the amount of debt involved was excessive. “The banks are behaving rationally,” he said.

Besides labor dissention, banks were reluctant to participate because the fees weren’t high enough to justify the risk involved, according to an informed source. “They pushed the banks hard on this one, and the banks just wouldn’t go for it,” the source said.

The lenders also had some concerns about United’s ability to repay the debt on time. The repayment plan assumed that the airline would be able to sell, and then lease back, many of its planes. With the company more heavily in debt after the buyout, bankers were fearful that leases would only be available at very high rates.

There were also questions as to how the Department of Transportation would view the transaction. Two weeks ago, Transportation Secretary Samuel Skinner ordered KLM Royal Dutch Airlines to reduce its investment in Northwest Airlines, and there has been speculation that British Airways might also be told to lower its proposed United investment. Such an action would force the Wolf group to find another source of equity financing and perhaps upset the delicate coalition that holds the group together.

The inability of the Wolf group to raise financing raised questions about Trump’s $7-billion offer for AMR, the parent of American Airlines. Trump has said he will include $1 billion of equity in his offer but has provided no other financing details, leading to skepticism over his ability to complete the deal.

AMR’s stock price slipped to $98.625 on Friday on the New York Stock Exchange before trading was halted in the mad selloff during the last hour of business. Trading was stopped because of an imbalance of orders for AMR, with many more sellers than buyers. Although the close was down just 12.5 cents from Thursday, it represented a $4.625 drop during the day.

AMR had climbed to $103.25 before its slide began in the early afternoon. The close was also the stock’s lowest price since Trump’s $120-a-share offer was disclosed Oct. 5.