How Icahn Is Planning To Deplane

To hear Carl C. Icahn tell it, he's a tired man. Five years of wrangling with top management as a 13% stakeholder in USX Corp. earned him only a 25% profit--far less than the 49% rise in the Standard & Poor's 500-stock index over the same period. And since 1986, when he climbed into the cockpit of Trans World Airlines Inc., the carrier has lost $287 million and is now skirting bankruptcy. "You can't win them all," Icahn says with a sigh. "But the last word hasn't been written yet."

With Icahn, it never is. He won't say what he'll do with the $1.02 billion he collected when he sold his USX stake on May 14. But he has taken the offensive at TWA. On May 15, he floated a bold proposal to buy out his TWA bondholders at much less than the face value of their $1.2 billion in securities. Threatening them with a long, painful bankruptcy reorganization, Icahn initiated an eyeball-to-eyeball confrontation with bondholders and labor unions.

BRIAR PATCH. While Icahn insists he'll end up with only table scraps, his plan

could work another way: If he can recapitalize TWA and gain union concessions, he may be able to sell his own equity stake and pull a handsome profit out of what appears to be a financial black hole. Erase the debt, and "the value of his equity could skyrocket," says one senior debtholder. Says Dillon Read & Co. analyst Raymond E. Neidl: "Now, he sees the opportunity of selling it whole."He'll have to negotiate a briar patch first. Bondholders and labor are leery of Icahn, who stopped payment on some bonds in January. Tentative talks with holders of the debt issues have already produced anger and suspicion of his motives. For its part, the unions believe Icahn shortchanged them when he bought the airline in 1986 and extracted concessions. "Everyone's been burned," says Kent Scott, TWA committee chairman of the Air Line Pilots Assn. Says one holder of TWA's equipment trust certificates: "A lot of people can't wait to get at him."

Icahn admits the negotiations have a good chance of eating up his equity. He's proposing to buy back TWA's debt with the $445 million he raised by selling TWA's London routes to American Airlines Inc. If the bondholders and unions don't take what he's offering, he'll probably have to give them stock.

At first glance, TWA's secured creditors seem to do O. K. under Icahn's plan (table). But they're angry that they'd get a haircut while unsecured creditors would collect $200 million. The most junior holders, with $471 million in unsecured debt, 40% of which is owned by Icahn, would receive 17 1/2~ on the dollar. Knowing that Icahn has just cashed in his USX stake, creditors are likely to demand more. "We're growing more militant," says Vito J. Iacovazzi, vice-president of Connecticut National Bank and trustee for the equipment trust certificates.

SIMPLE LEVERAGE. The unions are looking at an ultimatum that they're not apt to like any better. Icahn is asking the Air Line Pilots Assn. and the International Association of Machinists for $100 million in concessions in return for TWA stock. But union officials say money isn't the problem. Icahn is. Without new management, they won't budge. Says the pilots' Scott: "We're not giving them any more money to mismanage."

Icahn's leverage over his creditors is simple. If they don't take his offer, TWA will topple into bankruptcy court. Once there, anything can happen. And the Eastern Air Lines Inc. bankruptcy shows that extracting real value in a liquidation is almost impossible.

Icahn also has a lot to lose, as savvy bondholders know. A liquidation would wipe out his equity, and even a Chapter 11 filing would subordinate Icahn's claim on the airline to everybody else's. Bankruptcy court has other pitfalls, too. Although Icahn has been careful to shield other assets from TWA's problems, a bankruptcy judge might have the power to make demands on his vast holdings--including the money from USX.

While Icahn's equity would surely soar in value if it were unencumbered by debt, it's a risky play for whomever holds it. TWA may be too sick to save. Its fleet is among the oldest in the industry, sapping earnings when fuel prices rise. In the first quarter, TWA posted an operating loss of $91 million, compared with a $145 million deficit in the same period a year ago. Even if the bondholders accept Icahn's terms, the airline will have only $175 million in cash.

In the end, it may come down to who can hold out the longest, Icahn or his creditors. After years of staring down managements at such corporate behemoths as Phillips Petroleum Co. and Texaco Inc., Icahn may be tired. But by the time the TWA situation is resolved, you can bet his creditors will have bags under their eyes, too.

      Issue               Face value      Offer
         ($ millions)
      16% senior unsecured
      notes, due 1992          $68.9    $24.1
      17.25% senior unsecured
      notes, due 1993          265.8     93.0
      15% senior secured
      notes, due 1994          239.0    155.4
      12% junior subordinated
      debentures, due 2001     290.0     50.8
      12% junior subordinated
      debentures, due 2008     181.2     31.7
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