Merger Talk: United, buyout firms in heated game of poker Thu January 9, 2003 01:58 PM ET By Dane Hamilton NEW YORK, Jan 9 (Reuters) - United Airlines and some of America's biggest buyout firms are playing a high altitude game of bluff and double-bluff. Buyout firms, sometimes criticized as vultures hungrily circling corporate wreckage, say the nation's No. 2 carrier needs their money and expertise now to avoid being dispatched to an airline graveyard that grows each year. But from United's perspective, these private investment funds are pushing to get a large stake in the airline at a discount and at the expense of creditors and shareholders. UAL Corp. UAL.N , United's parent, filed for Chapter 11 bankruptcy protection on Dec. 9 in the largest aviation bankruptcy ever. The scenario is similar to the maneuvering that took place in the months before United did an emergency landing in bankruptcy court. At least one buyout firm, Greenbriar Equity Group whose roster includes Gerald Greenwald, UAL's former chief executive, offered to raise up to $1.5 billion for the airline, which could have helped it avoid bankruptcy, according to people familiar with the situation. And other firms, including Oaktree Capital Partners, among the largest distressed company investors, also sought talks with the airline, sources said. Both firms declined to comment. Instead, UAL pushed for a $1.8 billion federal loan guarantee, a strategy that ultimately failed as many expected, forcing the debt-strapped airline into court. Jake Brace, UAL's chief financial officer, acknowledged that UAL had "a lot of interest" from buyout firms in recent months. He said the airline may entertain offers from buyout firms later in the bankruptcy process, but is now focused on reining in costs. "We're going to deal with the capital structure later on in this process," said Brace in an interview. He declined to name the possible suitors or any terms they were proposing. Some bankruptcy experts say UAL is right to be urgently focused on cutting costs now, particularly since it must meet stringent financial targets to keep within the requirements of a $1.5 billion "debtor in possession" loan arranged last December. It already has access to $800 million this loan, but if it doesn't meet financial targets, it may not get the second, $700 million tranche, the company has said. "The company is right to be focusing on restructuring operations, dealing with the unions and meeting the terms of the DIP loan," said Chester Salomon, a bankruptcy lawyer with New York's Salomon Green & Ostrow, which represents one of many UAL creditors. "This is a critical time for their survival and they have to set things right to reach the break even point." The United stance rankles buyout executives, who say the company should be negotiating for outside funding now to avoid what they see is a very real possibility that it won't meet terms to get the $700 million. If it doesn't, lenders have the right to immediately call in their loans, forcing UAL to liquidate and join Pan Am, Eastern and others in the scrapheap of the U.S. airline industry, experts say. "If lenders declare a default, they have the right to immediately liquidate their collateral and the airline would shut down," said David LeMay, a bankruptcy lawyer for Chadbourne & Parke who was involved in Continental Airlines' CAL.N second bankruptcy in 1990. Unless lenders accepted loan covenant waivers or refinanced, "it would stop the music," he said. LIMITED OPTIONS By its own admission, United's financing options are extremely limited. Prior to its bankruptcy filing, UAL said it was turned down for loans from 25 banks, while credit agencies downgraded its debt well into "junk" territory, obliterating its ability to raise funds from either bond or equity markets. The dire situation puts cash-rich LBO firms in pole positions to help finance and restructure UAL -- for a price. That price, they say, is preferable to liquidation, a move that would put some 80,000 employees out of work, disrupt the airline market and leave stockholders and creditors with little or nothing. "I see no signs that the current management is pursuing any alternatives," said one buyout executive, who asked for anonymity. "For such a plan to happen, they would need to be working on it right now." Buyout executives cite Continental as one example of a successful leveraged buyout. Once written off as another failed airline, Continental emerged with adroit management and the financial backing of Texas Pacific Group in the early 1990s. It is now one of the strongest carriers. The gamble paid off big for Texas Pacific, which at that time took a one-third stake in Continental for some $400 million with partner Air Canada in a bankruptcy court auction. Led by Texas Pacific founder and then-UAL Chairman David Bonderman, the buyout firm returned about 10 times its investment to the firms partners, which are big pension funds and others. A UAL sale to a buyout firm would likely leave employee shareholders with zero or a fraction of the former holdings, but that prospect is inevitable in bankruptcy anyway. And it's preferable to liquidation, even for a company 55 percent held by union and employee-stockholders who likely have a lingering distaste for Wall Street leveraged buyout firms. During the LBO era of the 1980s, such firms were denounced as "asset strippers," who financed hostile takeovers with borrowed money then sold them for parts. Now LBO firms rarely go hostile, but they still have access to billions of dollars in capital. Creditors may force UAL to tap those funds in coming weeks, but only if it is able to cut enough costs to come close to cash flow positive. If it can't, United will begin fire-sale asset disposals and likely liquidate. Not everyone would cry, however. Rival airlines would quickly take up the slack, airline executives say. "There would be a period of turmoil, but it would be short," said a senior executive for a large competing airline. "United's major markets would be quickly filled by competitors." Roger EWROPS