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Airline Deals Prove the Takeover Game Survives, But Rules Are Changed With PM-Markets Rdp, Bjt

October 18, 1989

NEW YORK (AP) _ The rules of the mergers game may be changing, but it’s clear there’s no shortage of players - even if there is turmoil on Wall Street.

While UAL Corp. executives were trying to appease big banks and salvage a planned buyout of the parent of United Airlines Tuesday, a much smaller carrier, Mesa Airlines Inc., received a takeover bid from Stateswest Airlines Inc.

Stateswest, which like Mesa is a small regional carrier, declined to reveal the terms. But coming as the stock market continued to fluctuate - the Dow Jones industrial average closed down more than 18 points after seesawing throughout Tuesday’s session - the offer showed there’s still confidence in the takeover business.

In the UAL deal, the management-led investor group seeking to buy the airline restructured its offer and lowered its price to $5.62 billion from $6.75 billion, trying to persuade Japanese banks to help finance the takeover.

News that banks would not back the deal contributed to the stock market’s tremendous slide on Friday, when the Dow Jones average plunged 190 points. It also raised concerns that takeovers had skidded to a halt.

On Monday, one possible takeover bid became a casualty of the market volatility as developer Donald Trump withdrew his $7.5 billion proposed offer for AMR Inc., the parent of American Airlines.

Andrew Geller, who follows AMR for Provident National Bank in Philadephia, said the snag in the UAL offer probably helped Trump decide to shelve his proposal.

Observers said the takeover business would survive the UAL problems and the tumult on Wall Street. But billion-dollar buyouts were expected to be more difficult to accomplish and prospective deals were likely to undergo the same kind of scrutiny as the UAL offer.

Bankers have become cautious because companies such as Campeau Corp. and Resorts International Inc. have been unable to make the interest payments following takeovers.

Campeau, for example, ran into trouble because its Federated Department Stores Inc. and Allied Stores Corp. units did not have the kind of sales that Chairman Robert Campeau anticipated when he went heavily into debt to buy the two retailers.

Without those sales, Campeau did not have enough cash to pay his bills.

Bankers want to ensure that a company will be able to handle the heavy debt load undertaken in a buyout and ″are looking at a certain kind of credit risk,″ Geller said.

UAL’s bankers are concerned about a falloff in air travel. If United does less business it would not have the cash needed to service its debt, and its assets - particularly its fleet of airplanes - would be worth less because of the reduced demand.

By lowering its price, the group seeking UAL is lowering the payments it would have to make after the buyout and thereby easing its cash flow requirements.

While all deals will be examined closely, some prospective buyers will have an easier time than others.

For instance, analysts say, if KohlbergKravis Roberts & Co. were presenting its $24.53 billion bid for RJR Nabisco Inc. before banks today, it likely would win approval for its proposal faster than if it were buying an airline like United.

The reason is that RJR Nabisco has a business that is considered ″recession proof.″ Even if consumers become cautious, they’ll still buy the food and tobacco company’s products and its cash flow would likely be steady.

Put another way, consumers might forgo expensive vacations and put a crimp in an airline’s cash flow, but they would not stop buying Oreo cookies or Camel filters.

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