"Financiers look to pick up pieces if United fails"

Wednesday, November 6, 2002

Financiers look to pick up pieces if United fails
By John Schmeltzer
The Chicago (IL) Tribune


Even as United Airlines announced Tuesday that a German bank will
restructure imminent loan payments, at least three investment groups are
working on plans to bid for control of the struggling carrier should it
land in bankruptcy court.

Texas financier David Bonderman, California oilman Marvin Davis and
billionaire investor George Soros head the three groups expected to bid
for United if the Elk Grove Township-based carrier is forced to seek
bankruptcy protection, airline officials said. In addition, sources said
Houston-based Continental Airlines has been preparing a bid to acquire
United in the event of a bankruptcy filing.

Tuesday's $500 million loan deal between United and Frankfurt-based
Kreditanstalt fur Wiederaufbau will delay critical payments due over the
next 30 days until 2007, easing the financial pressure the airline is
facing. United had a $300 million payment due Nov. 17.

Shares of parent UAL Corp. rose 97 cents to close at $4.17 on news of
the debt restructuring. Still, the airline continues to lose millions of
dollars each day and will have a negative cash flow of $1.2 billion in
the fourth quarter.

"This doesn't really take the pressure off," said Jake Brace, executive
vice president and chief financial officer of United. "It relieves a
Nov. 17 deadline."

Additionally, United faces bond payments of $375 million due Dec. 2 and
another $400 million due in early 2003.

Although the refinancing could improve United's chances of obtaining
$1.8 billion in federal loan guarantees and avoid a trip through
bankruptcy court, it is unlikely to stop the plans of the financiers
poised to bid for the airline if it files for bankruptcy.

Bonderman provided bankruptcy financing for Continental Airlines and
America West Airlines; Davis has teamed with Jonathan Ornstein, the
chairman and chief executive of Mesa Air Group; and Soros--who began
buying stock in UAL Corp. this year--leads the third group, according to
some of those involved in the deals and various industry sources.

A bankruptcy filing would give any of the groups the opportunity to bid
for United or provide financing in exchange for a controlling stake in
the airline.

"It makes a lot of sense to me," said Darryl Jenkins, director of the
aviation institute at George Washington University. "Getting ready is
actually reasonable. One thing for sure is there will be people popping
up all over the place wanting to buy United."

Bonderman and the group headed by Davis and Ornstein are familiar with
bidding for the remains of shattered airlines.

Both were bidders this year for a 37.5 percent stake in US Airways when
it emerges from bankruptcy protection. The Davis/Ornstein group was
outbid by Bonderman's group. But Bonderman, co-founder and a partner in
Ft. Worth-based Texas Pacific Group, subsequently was trumped by a bid
from the Alabama State Pension Fund.

When asked about the groups preparing plans for a bid, Ornstein,
contacted in his Phoenix office, said, "All you have to do is connect
the dots."

Unions cool to Ornstein

Ornstein, who gained control of Mesa Air in 1998, has earned the scorn
of the Air Line Pilots Association for his "scorched earth" tactics. The
union has charged Ornstein's behavior is reminiscent of union buster
Frank Lorenzo, former chief executive of Continental and defunct Eastern
Airlines.

Ornstein brushed off the criticism. "Unfortunately, there are not a lot
of CEOs they seem to like," he said. "At least not ones they have to
work with."

Owen Blicksilver, a spokesman for the Texas Pacific Group, declined to
comment about talk that Bonderman was contemplating a bid. Efforts to
contact Soros were unsuccessful.

An outside investor could gain control of United, the world's
second-largest airline, in a bankruptcy and could end up owning the
entire company.

An investor also could gain a controlling stake in return for providing
so-called debtor-in-possession financing. That's the method that
Bonderman used when he gained control of Continental and America West
Airlines in the early 1990s. It is what he tried to use to gain control
of US Airways.

Also, an investor could acquire a company by agreeing to pay creditors a
higher percentage of what they are owed than the amount being offered by
the company.

Continental an alternative

Continental could present a third alternative by offering to merge with
a bankrupt United. Normally, the plan by Continental, the nation's
fifth-largest carrier, to acquire United would have little chance before
government regulators because of the behemoth airline that would be
created.

But antitrust concerns about size were pushed aside when American
Airlines stepped in last year and offered to save 20,000 jobs at St.
Louis-based Trans World Airlines, a move that created the world's
largest airline. The stakes would be higher at United, which employs
85,000.

Glenn Tilton, United's chairman and chief executive, said concerns about
the future of United are overstated.

Referring to the German bank's agreement to refinance its loans, Tilton
said, "We appreciate this significant show of confidence in United's
future by KfW. This is a welcome development in our continuing efforts
to achieve an out-of-court recovery."

KfW is the development bank of the German government and helped finance
United's purchase of Airbus passenger jets.

The efforts by Continental and the investment groups could complicate
United's drive to win pay concessions from the unions representing the
airline's employees.

While some said United's loan restructuring took the pressure off the
machinists to agree to a deal, Brace insisted that nothing has changed.

"Negotiating this transaction is proving to be quite a challenge. We're
working with them to avoid [a bankruptcy]."


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