United sparks buyout buzz

The Baltimore Sun

CHICAGO -- Is United Airlines charting a leveraged buyout that would place its ownership in private hands?

That's the buzz in aviation circles.

The carrier passed on taking equity from outside investors when it emerged from bankruptcy this year. But the current economic and political environment may cause its management to reconsider.

Private-equity firms are snapping up everything from hotels to hospital chains in a buyout frenzy that's reminiscent of the corporate-raiding days in the late 1980s.

Despite running up staggering losses during the recent aviation slump, United has plenty to offer large investors with an appetite for risk, experts say.

The nation's second-largest carrier boasts one of the best route networks in the world, a glittering hub at Chicago's O'Hare International Airport and a frequent-flier program worth billions of dollars.

Led by chief executive Glenn F. Tilton, UAL Corp., United's parent, has a management team eager to deal and willing to consider unconventional means to achieve objectives.

"Stranger things have happened," said Gordon Bethune, former CEO of Continental Airlines and chairman of Aloha Airlines, which exited bankruptcy this year with financing from Yucaipa Cos. LLC, the fund associated with billionaire investor Ronald W. Burkle.

Tilton is intent on reshaping United and has hired Goldman Sachs & Co. to scope out its strategic options, such as a merger, say people close to United.

The airline needs a merger to strengthen its market position and buy more planes.

To do that, United would need the outside capital it previously rejected, thus putting it on a path to privatization, say investment professionals.

United's market capitalization is roughly $3.7 billion, not enough to acquire either Delta Air Lines Inc. or Continental Airlines Inc., the two airlines considered United's likely targets.

"A privatization structured through a private-equity fund is the likeliest of all outcomes," said William A. Brandt Jr., a restructuring expert who is president of Development Specialists Inc. of Chicago.

But there's plenty at United to spook investors. The airline's unions are simmering over a recent 40 percent pay raise given to Tilton and have the power to derail any deal. And the upswing that powered United and other U.S. airlines to profitability over the past two quarters may not last. Early indictors for 2007 point to the travel market cooling along with the U.S. economy.

United officials won't comment on the privatization talk.

"This is speculation heaped on speculation, and hardly worthy of a comment," said Jean Medina, a United spokeswoman.

Investors continue to pour money into airlines, even though the largest U.S. carriers lost $35 billion from 2001 to 2005. Private equity financed Aloha and Air Canada's emergence from bankruptcy, as well as America West Holdings Corp's merger with US Airways Inc. last year.

Based on United's market capitalization, investors would have to pony up about $4.3 billion to buy out shareholders, analysts say.

"They have to be looking at [going private] and doing the modeling," said Vincent A. Kolber, a Chicago aviation investor who's familiar with complex financing but has no inside knowledge of United's dealings. "A private-equity firm brings capital and a shield [from public scrutiny]."

United needs outside investment if it is to upgrade its fleet to keep pace with competitors at home and abroad. Northwest Airlines recently announced it was proceeding with plans to purchase 18 Boeing 787 Dreamliners.

"If they need to recapitalize, then a going-private transaction is probably the best way to do it," said aviation consultant Robert W. Mann, principal with R.W. Mann & Co. in Port Washington, N.Y.

Going private also would allow United executives to immediately cash out millions of dollars in restricted stock and options.

United has few unencumbered assets for investors to leverage, since its planes, gates and landing rights already serve as collateral to lenders.

However, investors could spin out the airline's popular Mileage Plus program as a separate company to help pay for the deal. Air Canada's corporate parent, ACE Aviation Holdings Inc., last year spun out a minority stake in Aeroplan, its frequent-flier program.

Tilton, a former oil executive who helped craft Texaco Inc.'s $35 billion merger with Chevron Corp. in 2001, knows how to strike deals.

He's also a vocal proponent of large-scale airline mergers and easing regulatory barriers to foreign investment in U.S. airlines. Such rules, for example, prevent Tilton from pursuing a merger or joint venture with Germany's Lufthansa AG, United's partner in the Star Alliance, the multi-airline operating partnership.

But a Bush administration push to relax those standards stalled amid fierce resistance from Congress this year, and similar measures would be even less popular with the new Congress controlled by Democrats, forcing United to seek investment from within the United States.

"It's not even on the back-burner, it's off the stove," said Mann.

Julie Johnsson writes for the Chicago Tribune.

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