UAL OKs $4.38-Billion Takeover by Employees : Airlines: Deal would create biggest worker-owned company. Lack of financing is possible stumbling block.

NEW YORK —  UAL Corp., the parent of United Airlines, announced Friday that it will be purchased by its employees in a $4.38-billion deal that will make it the nation’s largest employee-owned company.

If the transaction is completed, UAL shareholders will receive payouts of cash and debt valued at an estimated $201 per share.

Agreement on the deal by a consortium of labor unions and the company’s board of directors was reached after an all-day, all-night board meeting that ended at 6:47 a.m. Friday. It ended a months-long saga of bidding and counter-bidding that included a $6.75-billion offer last fall for the nation’s second-largest airline. That proposal collapsed when financing could not be arranged.

The employees, who must still ratify the agreement, would own 100% of the corporation, and there would be no outside equity participation.

It is doubtful whether the traveling public will notice much change, other than that employees’ morale--and the level of service they offer--may rise when they understand that they are working for themselves.

In the announcement Friday by UAL and the United Employee Acquisition Corp., a company created especially for the takeover, it was disclosed that the financing for the purchase had not yet been arranged this time either, a factor seen by some analysts as a possible stumbling block.

“The financing for this transaction is no piece of cake,” said Edward Starkman, airline analyst with the New York investment firm of PaineWebber Inc. “I still have a lot of questions. We are not in a great lending environment, in general, and all you have is an employee group and no management.”

But John Peterpaul, a vice president of the International Assn. of Machinists and Aerospace Workers, although sidestepping numerous questions about financing at a news conference here Friday, insisted that arranging financing will not be difficult. “We are very optimistic,” he said. “The banks look favorable.”

Under terms of the deal, for each share of UAL stock, shareholders will receive $155 in cash, $35 worth of UAL debt and one share of a new security issued by Covia Corp. Covia, which is half owned by UAL, operates United’s Apollo computer reservation system. UAL estimated that the Covia stock will be worth $11 a share.

UAL stock closed down $2 a share at $163.50 Friday on the New York Stock Exchange.

The agreement puts an end to a threatened proxy fight for control of UAL’s board by a New York investment group, Coniston Partners. Coniston, which is UAL’s largest single shareholder, with an 11.8% stake, said it would help the unions in their efforts to acquire the airline.

“We are supportive of the transaction,” said Gus Oliver, a principal in Coniston. “It is a friendly deal. I think it is worth it for the unions to pay a bit more (for UAL) to get a friendly deal.” Oliver said Coniston’s investment was purchased for an average of about $160 a share. The profit, he added, had not been calculated.

When completed, Peterpaul said, the sale “will benefit all the employees of UAL. It will ensure its viability.”

But some observers said that United will have to take on a dangerously heavy load of debt if the sale is to be completed.

“Airlines should avoid leverage,” said Mark Daugherty, airline analyst in New York with the investment firm of Dean Witter Reynolds. “And that is especially true since they will have so much in the way of capital expenditures in the 1990s.” United operates a fleet of 431 airliners and has placed firm orders for another 264.

Peterpaul, along with Frederick Dubinsky, chairman of the UAL’s Air Line Pilots Assn. unit, and Diane Robertson, president of United local of the Assn. of Flight Attendants, said that once the employee buyout is completed, UAL Chairman and Chief Executive Stephen M. Wolf, who opposed the deal, would be ousted, along with the rest of UAL’s current board of directors.

Dubinsky said that the new board would consist of three members of the airline’s new top management, eight independent outside directors and four others, representing the three unions and the non-contract employees.

It was clear Friday, however, that Wolf has no intention of giving up control of the airline until the deal is consummated.

“Mr. Wolf has told employees he is committed to running the company as aggressively as he can for as long as he can,” Lawrence M. Nagin, senior vice president of corporate and external affairs, said in an interview.

And there is an outside chance that Wolf will not be leaving at all.

It was learned that the unions have some deadlines to meet if the deal is to be completed. Within four months, firm commitments for half of the needed amount must have been made by lenders, and the entire transaction must be completed within eight months, including approval by the Department of Transportation, the Justice Department and the Securities and Exchange Commission. If all this is not completed within eight months, the deal would fall apart.

Wolf joined United in December, 1987, from Los Angeles-based Tiger International, parent of cargo-carrying Flying Tiger Line. He was lured to United from Tiger by a package that included stock-based incentives estimated at the time to be worth between $10 million and $15 million.

Under Wolf, United’s hubs were strengthened, it rose from being the No. 3 airline serving the Pacific region to No. 1 and it ordered $19-billion worth of new planes. On May 15, it will enter the European market for the first time.

“It is a far different company that he will turn over to the unions when he leaves,” one expert observer of UAL said.

As part of the transaction announced Friday, the unions said they will make wage and other concessions worth $2 billion over the next five years. The concessions would amount to $300 million in the first year of employee ownership and increase to $500 million in the fifth year.

Pilots with more than five years at the company would make wage concessions of 11%; those with less longevity would give up 7%. Flight attendants and machinists would give back 7.69% if they have more than five years of service and 5% if they have worked less than five years.

When fully implemented, the deal would give the pilots ownership of 37.9% of the new company. The machinists would get 35.7%, non-union employees about 14.3% and the flight attendants about 12%.

UAL has been in turmoil off-and-on for about three years.

In April, 1987, the company’s pilots startled the industry by offering $4 billion for the airline, which was then a subsidiary of an entity called Allegis Corp. Allegis also owned Hilton International Hotels, Westin Hotels, the Hertz rental car system and Covia, the computer reservation system subsidiary.

It was the diversification that troubled the pilots, who said that the company’s strategy of being a one-stop travel shop was misguided. They wanted Allegis to divest itself of the other businesses so it could concentrate on running the airline.

They added that their own careers were being jeopardized because Allegis was paying too little attention to the carrier and that the company was using airline profits to bolster its other businesses.

The pilots’ offer put the company into play, and it has been in that position for most of the time since then.

Allegis Chairman Richard Ferris was ousted in June of 1987--to be replaced by Wolf--and the board agreed to sell the outside businesses to concentrate on running the airline. And it calmed unhappy investors by using the proceeds of the asset sales to make extra payouts to shareholders.

The name Allegis, a Ferris-coined name, was changed to UAL Corp. Today, UAL’s only asset, in addition to the airline, is 50% of Covia. It has sold everything else.

The asset sales placated the pilots to some extent, though they never actually withdrew their purchase offer, which lay dormant until late last year.

After a period of relative calm, things began popping at UAL again about nine months ago.

Los Angeles financier Marvin Davis offered $240 a share, or $5.2 billion, for UAL last July. By August, he had increased the offer to $275 a share, or $6.2 billion.

Then, on Sept. 21, a combination of UAL managers, United’s pilots and flight attendants, and British Airways made an offer to purchase for cash all outstanding shares of UAL common stock for $300 a share, or $6.75 billion. The machinists union did not join the buyout attempt, objecting to the heavy load of debt the company would have to assume.

When the financing for the proposed deal was reported to be in trouble last Oct. 13, the stock market took a tumble, with the Dow Jones Industrial Average dropping 190.58 points.

WORKERS REACT--Opinions differ, but most UAL employees want the issue of theairline’s future resolved. D1

EMPLOYEE OWNERS--Many employee buyouts of companies have led to better products and fatter profits. D1

ANALYSIS--James Flanagan says the big challenges at UAL involve people, not money. D1