Buyout in the Rack of the Ruined - Friendship, Need Eased the Way for Texas Pacific''s US Airways De



Buyout in the Rack of the Ruined - Friendship, Need Eased the Way for Texas Pacific''s US Airways Deal
WASHINGTON (Washington Post) - Earlier this summer John E. Luth, president of the investment bank Seabury Securities LLC, contacted numerous companies that could potentially help financially struggling US Airways, but he said Texas Pacific Group quickly emerged as the front-runner.
By August, as US Airways was edging toward bankruptcy, its chief financial officer, Neil Cohen, was spending hours in New York and Arlington negotiating details of the bailout with Texas Pacific partner Rick Schifter, according to Luth, who also participated in the talks.
Because Texas Pacific principle David Bonderman and US Airways'' president and chief executive, David N. Siegel, were old friends, the two groups were able to move more swiftly than other parties might have, and "speed was an issue," said Luth.
Thus Texas Pacific got the nod -- for now. But other groups could top the Texas Pacific offer, and bidders are probably waiting in the wings, according to Luth.
Texas Pacific''s agreement with US Airways is the latest in a series of marquee deals that have been struck by wealthy bargain hunters prowling the countryside, armed with billions of dollars and enticed by the abundance of cheap companies and cheap money.
Warren E. Buffett''s Berkshire Hathaway investment group has proposals to purchase struggling telecom and energy companies, and Carl Icahn''s High River LP has offered to buy secured loans from XO Communications Inc., an Internet and telecommunications company that is under bankruptcy protection. Washington-based Carlyle Group and private equity firm Welsh, Carson, Anderson & Stowe have agreed to a $7 billion deal for the yellow pages arm of Qwest Communications International Inc.
Signs point to even more frenzied activity in the months ahead, according to some buyout firms. Companies are cheap because of the stock market''s decline, and interest rates are at a 30-year low. In addition, a big chunk of money is available -- $120 billion was managed by buyout firms at the end of 2001, according to Thomson Financial.
"It''s better than it''s been in quite a while, and like a lot of people, we''re looking at our options," said Stephen Schwarzman, president of the Blackstone Group, a major buyout firm. "There are a number of good ones out there."
"The best time to put money in is when times are bad," said a Texas Pacific spokesman. "And for Texas Pacific, now is the best time, maybe ever."
Investors of distressed property can lessen the blow of an economic downturn, giving companies the financial and management resources they need to turn around their struggling operations. But they also can extract a high price in return -- not just money but also a big say in the restructuring.
A look at the Texas Pacific-US Airways agreement illustrates how such deals come together, what companies have to give up, and some unusual help they gain.
Personal Ties
When Siegel first contacted Texas Pacific in June, he still hoped to avoid bankruptcy, according to sources. But Texas Pacific told him that was a non-starter, the sources said.
Luth had contacted numerous potential investors. He declined to say with whom he talked, but other sources said one party that is still interested is a group composed of Mesa Air Group, US Airways'' largest single shareholder, and Los Angeles billionaire Marvin Davis, who on three previous occasions has tried to buy into an airline.
But Luth, Siegel, Bonderman and Schifter had long known each other -- personal ties that helped speed things along, according to both sides. "Texas Pacific has known US Airways'' executives for years, and they knew Texas Pacific''s turnaround experience," said a Texas Pacific spokesman.
Likewise, Bonderman''s and Shifter''s "comfort level with Siegel was very important," Luth said. Luth also knew all the major participants because he had worked with them on an earlier deal involving Continental Airlines Inc.
Another plus for Texas Pacific, according to sources, was its extensive experience in the airline business. Bonderman got involved with airlines as a bankruptcy attorney for the old Braniff International Airways in the early 1980s. After working for Texas financier Robert Bass, he founded Texas Pacific with Bass colleague James Coulter and William Price from GE Capital.
Texas Pacific invested $50 million in Continental in 1993, when Siegel was one of the carrier''s key executives. The successful turnaround of Continental enabled Texas Pacific to sell its share for more than 10 times its investment. It also did well with its America West Airlines investment, tripling the $55 million it spent on the company.
"Every time they''ve gotten involved with an airline, they''ve left it better off than before," said Michael Boyd, president of the Boyd Group aviation research firm.
Although Texas Pacific was putting together another major deal this summer with restaurant chain Burger King Corp., it moved swiftly on the US Airways effort. The two sides worked out terms that would make Texas Pacific the airline''s biggest shareholder -- with 38 percent of stock and five out of 13 board seats -- in return for a $200 million investment after US Airways emerges from bankruptcy court.
Texas Pacific also agreed to put up $100 million in debtor-in-possession financing -- money the company can use while it restructures.
On Aug. 11, after the details were finalized, the airline filed for bankruptcy protection.
Under the terms of the agreement, after Sept. 23, US Airways is free to consider other offers. Luth thinks there will be others. "We expect that a number of parties will be in touch," he said, "and it''s likely a better offer will emerge."
"I''d be shocked if there weren''t modifications," said Goldman Sachs airlines analyst Glenn D. Engel. "Things can change quickly. This is the airline industry, after all."
Targeting Airlines
Buyout firms often view their businesses in vastly different ways.
Some specialize in certain sectors. Carlyle Managing Director William E. Conway said his company focuses on five areas: telecommunications, health care, consumer industrial, aerospace and defense, and transportation.
Schwarzman said the Blackstone Group "will go into any industry that looks promising." It has raised a $6.45 billion fund and so far has invested heavily in property-casualty insurance companies, such as Axis Reinsurance and Wellington Reinsurance.
Texas Pacific has bought companies as varied as Italian motorcycle manufacturer Ducati and American clothing retailer J. Crew. But it is best known for forays into the airline industry.
Harvard Business School professor Stuart Gilson, who teaches a bankruptcy restructuring class, said airlines are particularly good targets for buyouts. Bankruptcy proceedings allow companies to renegotiate lease arrangements, and a high percentage of airline assets are leased, he said.
In addition, planes and landing slots are "highly divisible," which makes them easier to sell off in small pieces without decimating the company, Gilson said.
The strategy of buyout firms differs significantly from that of venture capitalists. Venture firms fund large numbers of unknown start-ups in hope of big payoffs from just a few. Buyout firms expect smaller returns but view the investments as less risky because the companies they are buying are usually known quantities with track records to examine.
But Texas Pacific is widely viewed by industry insiders as taking bigger risks than competitors. Although the Continental and American West investments paid off big, a recent investment in candymaker Favorite Brands International Inc. turned out to be a loser when the firm went bust.
"David Bonderman is an excellent investor, probably the best out there at the riskier deals," said the head of a major buyout firm. "They hit it big more than most of us, but they also lose more than their share."