MPR: Negotiating Northwest: Who Profits?

Negotiating Northwest: Who Profits?
By Bill Catlin
July 17, 2000

The fate of Northwest Airlines may not be known for weeks or months, but a number of observers say Northwest holds considerable leverage over American Airlines in merger negotiations.

The Future of NWA
For more stories and background on the potential merger between Northwest and another airline, visit MPR's Future of Northwest site.

THE TWO AIRLINES began talks just days after United Airlines made its stunning announcement that in May the nation's biggest air carrier had reached an agreement to buy US Airways. That deal has shaken up the airline industry and may yet be rejected by federal regulators.

The sale of Northwest would probably mean a huge payday for the company's two most prominent investors, Al Checchi and Chairman Gary Wilson.

Checchi, Wilson and a third partner led a nearly $3.7 billion buyout of Northwest Airlines in 1989. Their investment, $40 million.

For each dollar of that original stake, their combined holdings are now worth more than $22, based on last Friday's closing stock price. Negotiators for Northwest and American, however, reportedly are far apart on how much the airline is worth.

According to one wall street estimate Northwest is worth $55 per share, for a total of about $4.6 billion. At that price, Wilson and Checchi's combined share would be worth more than $1.2 billion.

While many analysts say that the two companies will eventually agree on terms, as one wall street source put it, Northwest has all the leverage.

Holly Hegeman, an airline industry columnist for thestreet.com, an investment website, puts it another way.

"To make a long story short, Northwest really is the jewel of the crown right now."

In an industry looking at how to respond to United's proposal to create a huge national network by combining with US Airways, Hegeman says Northwest looks like the most desirable company to buy.

American has had a gun put to the side of their head by the fact that United announced a deal with US Airways. The US Airways deal would give United an even bigger advantage over their number two competitor, American. Northwest has several important assets that appeal to American Airlines. Its extensive Pacific route network, including a hub at the Tokyo airport would give American something it reputedly covets and a way to counter United's strong pacific business.

Northwest also holds a majority of Continental Airlines shares with voting rights giving it effective control over any future purchasing opportunities. That is important because Delta is expected to bid for Continental if American buys Northwest. The U.S. Justice department has sued to wrest that controlling stake away from Northwest, but a trial is months away or maybe more.

Darryl Jenkins, an aviation expert at George Washington University says Northwest officials are stressing such points in any negotiations.

"I think American, on the other hand, will say, at this prom, we are the only suitor, and if you turn us down and don't go to the dance with us, there are no other partners."

Holly Hegeman says those arguments may ring hollow to Checchi and Wilson.

"I think Al Checchi and Gary Wilson will do a deal when they want to do a deal," she says. "Should they be in a hurry, or are they going to lose out, if they don't do anything? I don't think so. I think all the pressure is on American."

"To make a long story short, Northwest really is the jewel of the crown right now."

- Holly Hegeman airline industry columnist

The question then, may be how much will American have to pay. Northwest's stock price spent part of 1998 trading above the $55 level, reaching more than $64. While several company executives sold stock at the time, those share prices did not entice Checchi to sell his holdings. Wilson did sell some stock that year, but Northwest officials said that at the time it was related to a deal removing one of their original partners, KLM Royal Dutch Airlines, as a Northwest shareholder.

Darryl Jenkins of George Washington University feels that American must guard against paying too much for Northwest.

"You would have stockholders lawsuits coming out your wazoo for the next 20 years and that's what American airlines argument will be against Northwest airlines," Jenkins said. "They will give them some premium over $55, I assume, but not $80 or $90, and certainly not $100."

Holly Hegeman thinks if Checchi and Wilson let this golden moment pass, they may see another one. She says the increasingly likely merger of British Airways and KLM, which remains Northwest's European partner, would make Northwest even more valuable. Officials from Northwest and American declined to comment.

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