Doubts drip all over AMR’s USD3.25 billion buyout offer
Earlier this week, an unheard-of Florida company - Sterling Global Holdings - offered to buy AMR and take it private. The offer was not only sent to AMR, parent of American Airlines, but to media including the Dallas Morning News and the Fort Worth Star Telegram where articles were dripping with doubt about the legitimacy of the offer.
Interestingly, the company is making a run at another albeit unnamed, privately held US airline that might be merged with American so we can rule out the usual suspects for any merger deal. Let’s see, who are the privately held US airlines - Spirit Air? Trans States Holdings?
“Take this news with a big, big grain of salt, heavily laden with skepticism,” wrote DMN Aviation Editor Terry Maxon, who seemed skeptical even after he talked to the signatory of the letter Allen Weintraub, who completely dodged the question as to why Sterling Global Holdings has absolutely no footprint. Mr Weintraub only said that if American wanted a letter of credit from the institutions backing the offer, he’d be happy to oblige.
Late Tuesday, AMR issued a statement that it had, indeed, received such an offer and, even it, seemed to indicate the offer might be spurious. It said it is investigating but “at this time we have no corroborating information to demonstrate that the offer described is legitimate.” It also said, like the Dallas and Fort Worth reporters, it had never heard of Sterling Global Holdings or that it was even a shareholder. Weintraub told the Star Telegram he was a shareholder but a check with American late yesterday indicated they have as yet been able to confirm that.
Before getting into the offer, it begs the question as to why, and after much hunting, Maxon was able to speak with Sterling Managing Partner Al Weintraub who indicated it was because American looked to be a prime candidate for merger. Well, that is not news. So is US Airways but it seems, for the present, the industry is digesting Delta-Northwest, United-Continental and Southwest and AirTran before moving on to the next big deal.
Still, the question is not really answered just by saying it is a potential merger target. American is still making its way out of the recession and, while it has narrowed its losses, it is lagging the rest of the industry significantly. The airline itself has cited its higher costs, especially for labour, and the fact that it took so long to gain antitrust immunity for its trans-Atlantic and trans-Pacific joint ventures. Together they have to potential to add USD500 million to AMR revenues which would just about take care of last year’s losses.
Interestingly, the only thing that is for sale is American Eagle and the company has yet to make any headway largely because of its much higher costs. The Allied Pilots Association indicated it expects an Eagle decision by May which would likely be a sell off to AMR shareholders. That is not surprising, since the entity has been on the market, with no takers, since 2008.
Indeed, when asked about such an acquisition, regional airline holding companies just roll their eyes and say the company would have to radically change for them to be interested, again citing the costs and the prospect of restructuring a company that has never made money. The American feeder operation is unique in the industry posting losses as the express programs at United, Continental, Delta and US Airways contribute handsomely to the mainline’s bottom line.
Letter offers a share premium
The Sterling 29-Mar-2011 letter to AMR CEO Gerald Arpey, the AMR board and all large shareholders, was a formal notice of the intention to purchase all outstanding AMR shares for USD9.75 cash per share, which, noted Mr Weintraub in the letter, was a 48% premium over the current price. Sterling wants to acquire majority control and “hopefully not force a hostile purchase and change to the board.”
The current market cap for AMR is USD2.19 billion based on the closing price Tuesday at USD6.58. There are 334.4 million shares outstanding. Copies went to PRIMECAP Management Company, Blackrock, Inc, Fidelity Management and Research, Capital Research Global Investors, Capital World Investors, Vanguard Group and ICC Capital Management.
“With this offer we can close upon board and shareholder approval. We require no further due-diligence,” he said in the letter. “We will also assume all debt associated with the company. It is our intent to purchase AMR in an amicable manner, and continue with its core business.”
After a Google search revealed an article from the Rochester Democrat and Chronicle, Mr Maxon reported that Sterling had also made a run at Eastman Kodak for USD1.3 billion, or more than a dollar over Tuesday’s trading price of USD3.40 or USD4.81 per share.
Similar mysterious bid made to Kodak
Apparently, Mr Weintraub was keeping equally mum about his plans for Kodak, declining, as he did with Mr Maxon, to give any specifics. Mr Maxon quoted a Rochester, NY, newspaper, which noted Sterling did not come up in a Google search - now there’s a bad sign and the Florida secretary of state held no incorporation records for the company based in Davie, FL, according to the letterhead. The newspaper also reported that the fax number routed to a northeast Ohio offices of a California communications company, “a company that eFaxing, in which faxes are turned into emails."
Upon reaching Mr Weintraub, Maxon wrote the following update:
“The gist of his comments: He's got backers with the money to do the deal; he declined to name them. He's had conversations with some major AMR shareholders that like the idea; they've asked not to be named. His company has done a number of similar deals in the past 15 years; no names. He sees AMR as a good candidate for a merger with another US airline, privately held, not named. His company is not US domiciled, but the investment vehicle that would buy AMR would be a US-based company.”
Mr Weintraub and co would still be required to undergo a fitness investigation by the Department of Transportation.
Mr Maxon also printed a transcript of the conversation providing an interesting look at this mysterious company and Mr Weintraub who clearly does not care about whether or not anyone thinks him credible.
Q. Do you have USD3.25 billion?
A. "Oh, we have more than that."
Q. Who are your backers?
A. "Several large institutions."
Q. Why AMR, parent of American Airlines?
A. "We believe they're primed to be taken private. I believe that they are one of the few companies that are out there that still can be merged with other companies that we're looking at within another airline. I believe the two together would make perfect pieces to a puzzle."
Q. Why is there no background about your company out there? The question has to come up what evidence do you have that you can do such a deal?
A. "As far as evidence to prove, if AMR needs a letter of credit from any of the institutions we deal with, that'll be on their desks within five minutes."
Q. Have you done similar deals in the past?
A. "100 percent."
Q. And what size companies?
Q. Have you gotten response from Eastman Kodak (Sterling Global made a buy-out offer last week for Kodak shares)?
A. "Yes, we have."
Q. And have they said yes or no?
A. "It's basically being in discussions right now."
Q. Do you have a response from AMR?
A. "No, not as of yet. Usually when we present offers like this, we don't usually see a response for a couple of days. Not one person can make a decision."
Q. Have you sent a similar letter to any other airline?
A. "No. The one that we're looking at, that has nothing to do with this, is private."
Q. We presume the other airline is US-based.
Q. Why should AMR take you seriously?
A. "They don't have to."
Q. They probably have to take you serious if the deal is to go forward.
A. "Not really, not if I come together with the other shareholders and control more than 51% of the company. Nobody has to take me serious. I'll show them if they don't want to budge."
Q. Have other major shareholders, holders of more than 5% of AMR's stock, responded to your proposal?
A. "I've had conversations with them prior."
Q. Have they indicated they wanted to proceed with this?
A. "Some have."
Q. Would you like to mention any names?
A. "They asked not to, as well."
Q. What is your background? What companies have you worked for.
A. "We just buy distressed companies. We've been doing this for the past 15 years."
Q. Could you mention the names of some companies that you have bought?
A. "No. We don't comment on what we've done in the past. We just comment on what's on the plate today. We don't need to pat ourselves on the back. I don't need to pat myself on the back."
Q. I don't find Sterling Global Holdings mentioned anywhere. Have you operated it under different names?
A. "Oh, yeah, we've operated under several different names, correct. Whenever you buy an entity, you have holding companies. Whatever our holding companies are have no bearing on this AMR deal."
Q. Is your company a US-domiciled company?
Q. In what country is it domiciled?
That conversation does not exactly engender confidence. Star Telegram Aviation Editor Andrea Ailes was also skeptical about the offer, having talked to Mr Weintraub, getting much the same answers. She noted there were no SEC filings for the company
"There is a lot of consolidation in the industry and we have dealings with another carrier and the two would work beautifully together," Weintraub told Ailes.
All this is very interesting but as we read the transcript we flash backed to Frank Lorenzo in the run-up to his acquisition of Continental. If this is anything like that, the restructuring that American avoided in the post-9/11 period that put its costs so much higher than its peers would likely begin. Yes, Sterling will acquire the debt, declare bankruptcy and be done with it. And that would probably be just for starters. Even so, there is a long way between an offer and an buyout.