Copyright (c) 2002, Dow Jones & Company, Inc.

Thursday, September 19, 2002

The Economy: US Airways Receives Rival Bid From Alabama Pension Fund

By Kara Scannell

Alabama's public-employee pension fund offered to invest $240 million for a 37.5% stake in a restructured US Airways Group, topping an offer made in August by private-equity firm Texas Pacific Group.

The rival offer, which was sent in a letter to US Airways President David Siegel yesterday and is contained in documents being filed today in federal bankruptcy court in Alexandria, Va., could spark a bidding war for effective control of US Air, the seventh-largest U.S. airline.

The Retirement System of Alabama, known for its colorful investing style under its longtime head, David Bronner, owns about $340 million in US Airways debt that the airline used to finance the purchase of airplanes and equipment. It said its offer was fairer to shareholders and that bidding provisions contained in Texas Pacific's proposal "hardly create a level playing field."

"The biggest attraction to me was the great job that David [Siegel] has done getting US Air from where it was to all the progress it has made," Mr. Bronner said in an interview. He said the Alabama offer is "a much fairer deal to the employees, creditors and customers as well."

A spokesman for Texas Pacific declined to comment. US Airways also didn't have any comment.

US Airways, which listed assets of $7.81 billion and liabilities of $7.83 billion, was the first of the nation's largest airlines to file for Chapter 11 bankruptcy court protection since the Sept. 11 terrorist attacks. Airlines, battered by high labor costs, the sluggish economy and fierce price competition, have been struggling to stave off bankruptcy-court filings.

The Retirement Systems of Alabama, which has $25 billion in assets, said it would pay 20% more than Texas Pacific Group and wouldn't request any of the transaction fees that Texas Pacific requested as part of its offer made in August. In the filing, the pension fund says its offer topped Texas Pacific's by $50 million because it would provide an additional $40 million to investors and save $10 million by forgoing fees that Texas Pacific had requested. Alabama's offer would adhere to the other terms in the Texas Pacific agreement.

Texas Pacific, headed by David Bonderman, agreed to invest $200 million for a 37.5% stake in US Airways as part of a debtor-in-possession financing agreement arranged when US Airways filed for bankruptcy-court protection on Aug. 11. Texas Pacific also would get five of the 13 US Air board seats.

Under the Texas Pacific arrangement, the private-equity firm would collect between $7.5 million and $10.5 million in fees, including underwriting fees of $3.5 million for an initial $100 million commitment provided in debtor financing. The remaining $100 million would be invested after the restructured carrier emerged from bankruptcy-court proceedings. The Texas Pacific plan calls for a breakup fee of $7 million, or 3.5% of the value of the bid, according to the filing.

Mr. Bronner, CEO of the Alabama retirement system, objected to Texas Pacific's request that the firm have a chance to see any competing offers for restructuring US Air.

Motions to object to the bidding procedures were due in court today.

By topping Texas Pacific's bid, the Alabama fund is hoping to push the auction into high gear. It could also open the door for other bidders to emerge, although the hardships in the airline industry have already deterred many potential buyers.

The Alabama group faces a formidable competitor in Texas Pacific, which has offices in Fort Worth, Texas, and San Francisco. The firm's Mr. Bonderman made his mark restructuring airlines beginning with his hugely successful turnaround of Continental Airlines, which filed for bankruptcy-court protection in December 1990. Mr. Bonderman has longstanding ties with Mr. Siegel of US Airways, who worked as the president of Continental's regional carrier, Continental Express.

Just 18 months after the Continental investment, Texas Pacific helped America West Airlines emerge from bankruptcy-court protection.

Mr. Bronner, who has been in charge of the Alabama pension system since 1973, has been at the forefront of the pensions' nontraditional investments. The system funded the development of the Robert Trent Jones public golf courses in Alabama, several office towers to improve downtown Montgomery, and has interests in local media outlets.

Mr. Bronner's history of making investments to attract business and tourists to Alabama also could be behind his move to gain control of US Airways, which offers service to four Alabama cities, including Montgomery.