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United, Unions Agree To Modify Employee Buyout Agreement

May 23, 1994

CHICAGO (AP) _ The parent of United Airlines and unions representing its pilots and machinists have agreed to modify their $4.9 billion proposal to form the nation’s largest employee-owned company.

UAL Corp.’s sagging stock price and growing discontent among union members had reportedly put the deal in jeopardy.

The company disclosed the agreement on Sunday. It would grant workers a larger initial stake in the airline, make it easier for that ownership to be boosted later on and could increase the percentage of cash paid to existing shareholders.

″These modifications will help bring additional value to our stockholders by virtue of our ability to underwrite a portion of the recapitalization package,″ UAL Chairman Stephen Wolf said in a statement.

″Our employees and customers also stand to benefit from the revised transaction as United will be transformed into a much more cost-competitive company doing business in a marketplace where a low cost structure is essential to long-term viability,″ he added.

The agreement comes as the deal enters its final stretch. A shareholder vote is tentatively scheduled for June 16.

″We are enthusiastic and eager to proceed with closing the transaction promptly,″ Capt. Roger Hall, chairman of the Air Line Pilots Association, said on a tape-recorded message Sunday evening.

Jim Conley, chief spokesman for the International Association of Machinists, said he had not seen the agreement and was not ready to comment.

Leaders of the pilots union had met over the weekend with financial and legal advisers before deciding to go forward.

One of the chief concerns of the pilots was the effect of UAL’s declining stock price on their ownership stake in the airline. The agreement dealt with that directly.

Included in the modifications was an increase in the employees’ initial ownership of the airline to 55 percent from 53 percent.

Also, if the average market price of UAL stock exceeds $136 for the first year after the deal is closed, the stake employees own would increase as high as 63 percent. Under terms of the original proposal, the stock price would have had to exceed $170 a share for the employee stake to be boosted.

Wall Street’s initial reaction to the new deal was positive. UAL stock increased in early trading today by $2.50 to $121.87 1/2 on the New York Stock Exchange. But union leaders believed it would be tough to meet the $170 target.

The buyout in general calls for the pilots and machinists to trade $4.9 billion in wage and work-rule concessions for majority ownership of UAL.

The lower labor costs and promise of labor peace would then enable UAL to launch a second airline to compete with Southwest Airlines and other low-cost competitors.

The original buyout proposal, struck on March 25, called for existing shareholders to receive a combination of common stock, cash, preferred stock and debt.

Sunday’s agreement included changes to that payment. Under the modified plan, UAL will attempt to sell the preferred stock and debt to the public. If successful, the company said, the cash proceeds would be paid to existing shareholders.

Adjustments related to UAL’s employee stock ownership plan also will be made.

The company said it expects shortly to file revised proxy materials with the Securities and Exchange Commission to reflect the modifications.

Until Sunday’s announcement, the deal had seemed uncertain.

Gerald Greenwald, the former Chrysler Corp. vice chairman who would replace Wolf if the buyout succeeds, toured the country last week to reassure pilots that the deal was best for all parties.

The largest local of the Machinists union had earlier said it intended to stick with terms of the original deal.

But some members reportedly had retained a lawyer who was considering suing the union for alleged voting irregularities and fraud in the union’s ratification vote. Chicago attorney Arthur Holtzman told Crain’s Chicago Business a lawsuit could come as early as this week.

A telephone call to Holtzman at his office Sunday evening seeking comment on the agreement reached only a recorded message. His home phone number was not available through directory assistance.

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