March 31, 2023

DealBook Column: American Airlines and US Airways Dance Around a Merger

Tom Horton, chief of AMR, the parent of American Airlines.Nelson Ching/Bloomberg NewsTom Horton, chief of AMR, the parent of American Airlines.

It’s the ultimate cliché, but it is true: follow the money.

For the last several months, American Airlines’ new chairman and chief executive, Tom Horton, has been desperately trying to delay merger talks with his former cubicle mate, US Airways’ chief executive, Doug Parker. (Mr. Horton and Mr. Parker sat next to each other when they both worked at American in the 1980s.)

Mr. Horton put American’s parent, AMR, into Chapter 11 bankruptcy protection in November. Since then, US Airways has sought to merge with American to no avail — despite securing support for a deal from American’s own labor unions and many of its creditors.

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Virtually everyone in the industry believes that American, the third-largest airline in the country, and US Airways, the fourth-largest, will eventually have to merge to stand a chance of competing against United (which is the biggest and has merged with Continental) and Delta (which merged with Northwest). The question is when, not if.

“It’s not an option. It’s not an alternative. It’s inevitable,” Daniel Akins, a transportation analyst working for American’s flight attendant union, told a bankruptcy court in May. (What is less clear is whether a merger would be good for customers.)

Yet Mr. Horton hasn’t budged, beyond nodding to the overture by saying it will be considered as part of the company’s fiduciary duty to its creditors. Instead, he has repeatedly argued that the airline’s best strategic choice is to emerge from bankruptcy independently, declaring that he plans to restore American to its previous industry-leading position despite all the evidence that its market share is fast eroding.

But there potentially is another reason — one that would be a perverse incentive — that Mr. Horton may be shunning a deal with US Airways before emerging from bankruptcy: a giant payday.

Mr. Horton and his management team stand to receive somewhere between $300 million and $600 million if he can make it through bankruptcy court without merging first with a rival like US Airways.

In an odd twist of the bankruptcy process, airline management teams have typically managed to extract 5 percent to 10 percent of the company’s shares for themselves upon exiting Chapter 11, with the C.E.O. often getting 1 percent.

This happens, oddly enough, despite some of the same management wiping out shareholders (including themselves) by filing for Chapter 11 in the first place. AMR is expected to be valued at as much as $6 billion if it exits bankruptcy independently, analysts estimate.

Over the last several decades in the airline business, this is where C.E.O.’s have gotten rich.

Take a look at United’s bankruptcy back in 2005: Glenn Tilton, who was then the airline’s chief executive sought 15 percent of the company’s equity for management from creditors; after pushback from creditors, management lowered its request to 11 percent. After some back and forth, management was awarded 8 percent of the company. Mr. Tilton received a pay package worth nearly $40 million in new shares and other compensation in the company’s first year after emerging from bankruptcy.

A similar story played out when Northwest went through Chapter 11. Its former chief, Doug Steenland, received a package worth some $26.6 million in new shares when the company emerged from bankruptcy in 2007. Lest there be any question that compensation is clearly now on the minds of Mr. Horton and the rest of American’s management, just two weeks ago they inserted a special clause in the airline’s most recent tentative contract proposal with American’s pilot union preventing labor leaders from challenging any deal management plans to seek for itself in the bankruptcy process.

The contract reads: “APA agrees not to object to or contest the issuance of equity or other consideration in the bankruptcy cases to the company’s nonunion and management employees, in respect of the sacrifices made by them in furtherance of the company’s effort to restructure or as incentive for the nonunion and management employees’ future service to the company.”

That language is unusual, bankruptcy lawyers said. Advisers working for American, who did not want to be identified because the matter was confidential, said it was inserted because of the contentious relationship that the unions have long had with the company.

In a statement, American said, “This provision was specifically intended to give the union full transparency on plans for equity-based incentive compensation, which is a common form of compensation and aligns the interests of management and financial stakeholders. Any equity grants upon emergence would be subject to approval by multiple parties with a direct interest in the impact on value allocation. Any suggestion that management compensation would influence decisions about the best outcome for the company’s stakeholders is simply wrong.”

In fairness to Mr. Horton, the merger proposal by US Airways appears somewhat opportunistic and would be complicated. A deal to combine the carriers could be structured where American, not US Airways, was the acquiring company. These advisers have argued that American would be in a stronger position to negotiate a deal postbankruptcy.

The bankruptcy court has given American until the end of the year to come up with an independent reorganization plan, but the airline has also agreed to study its merger options. Mr. Parker of US Airways has sought to back American Airlines into a corner by offering huge, possibly unprofitable, concessions to American’s union workers, which are creditors in the bankruptcy process.

One critic of US Airways, William S. Swelbar, a research engineer in the Massachusetts Institute of Technology’s International Center for Air Transportation, wrote on his blog: “In its quest to acquire American Airlines, US Airways sounds like a teenager with its first credit card, spending money it doesn’t have.” Mr. Parker has been trying to engineer a merger for his company for years, repeatedly failing, notably losing a battle to merge with United. Mr. Swelbar said that Mr. Parker had “seduced some media and AA’s unions.”

It must also be noted that Mr. Horton has rejected two pay increases from American’s board and works without an employment contract. He is paid $660,000 annually while the company is in bankruptcy. Advisers close to the company say he is alert to the appearance of excessive compensation and may not seek an outsize compensation package upon exiting bankruptcy.

Still, given the logic of an American-US Airways tie-up — they are both the last independent hub-and-spoke players — it remains curious why they have not begun meaningful talks.

If you follow the money, you can see why Mr. Horton may want to avoid a deal, at least for now. On the other hand, if you follow the money, you can also see why Mr. Parker may want a deal. Surprise, surprise: there is a change-of-control provision in his employment contract that could kick-in if it is bought by another company and he is ultimately forced to leave. Depending on the structure of the deal, Mr. Parker could be paid more than $20 million.

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DealBook: Papermaker Owned by Cerberus Files for Bankruptcy

A NewPage paper plant in Escanaba, Mich.Nicole Gearhart/Associated PressA NewPage paper plant in Escanaba, Mich.

8:40 p.m. | Updated

The NewPage Corporation, the ailing papermaker owned by the private equity firm Cerberus Capital Management, filed for bankruptcy on Wednesday, blaming a sharp decline in the magazine industry, a spike in the cost of raw material and too much debt.

The company, which is based in Miamisburg, Ohio, and has 6,000 workers, will now operate under Chapter 11 bankruptcy protection while it restructures its balance sheet and seeks to slash its debt, which exceeds $3 billion.

The long-expected Chapter 11 filing in United States Bankruptcy Court in Delaware punctuates a painful investment for Cerberus, which borrowed heavily to acquire the MeadWestvaco paper mill business in 2005 for $2.3 billion and renamed it NewPage.

“The company’s current capital structure was put in place during a different time with different assumptions,” NewPage said in a statement.

NewPage is one of only several multibillion-dollar buyouts struck in the market boom — a list that includes the retailer Linens ’n Things, the music company EMI Group and the aluminum maker Aleris — that have ended in bankruptcy.

During the depths of the financial crisis, many private-equity watchers expected deep misery for the buyout firms that issued more than $1.5 trillion in debt to finance leveraged buyouts since 2003, according to Dealogic. But the number of bankruptcy filings was limited as the capital markets quickly recovered, allowing firms to shore up their companies by repurchasing debt or issuing new equity.

Still, Wednesday’s filing provides fodder for critics of the private equity industry who contend leveraged buyouts like the Cerberus takeover of NewPage destroy companies and jobs.

The NewPage filing is the second recent prominent legal case involving Cerberus, the New York investment firm that had ill-fated investments in GMAC and Chrysler. Last month, Cerberus was sued by Innkeepers USA Trust after it backed out of its $1.1 billion acquisition of the hotel company.

After being battered during the financial crisis, and suffering sizable redemptions in its hedge funds, Cerberus has had vast improvements. Among successful investments, the firm has made a killing buying distressed mortgages at the market bottom.

It has already written off its stake in NewPage, which has been a troubled investment from the start. Under private-equity ownership, NewPage, which specializes in coated paper for magazines, has shut factories and slashed jobs. The company operates 16 paper mills from Duluth, Minn., to Rumford, Me.

Cerberus brought in Robert Nardelli, the former head of Home Depot and Chrysler, last year as chairman to help turn the company around. He did not do so, and resigned in May.

NewPage alluded to another reason for the bankruptcy filing: the iPad. While not mentioning the Apple tablet or similar devices by name, the company’s bankruptcy papers cite “increases in the use of electronic data transmission and storage” and “an increased demand for electronic reading material.”

Now, several private-equity firms and hedge funds that own NewPage’s debt — the Avenue Capital Group, Apollo Global Management and Oaktree Capital Management among them — will fight in court to control the company.

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