`When I'm Down And Out, You Owe Me A Drink'

When it was over, all Carl C. Icahn could do was grin his puckish grin. Once again, the chairman of near-bankrupt Trans World Airlines Inc. had swooped down on an otherwise starchy bidding contest. And once again, he'd made life miserable for a conservative set of Main Street executives. Icahn lost the battle for Pan American World Airways Inc., but not before forcing Delta Air Lines Inc. to wade in deeper than it planned. "When I'm down and out," Icahn told Pan Am's happy creditors as he threw in the towel, "you owe me a drink."

Icahn's aggressive presence in the two-month contest for Pan Am forced Delta Chairman Ronald W. Allen to pay $361 million more in up-front cash than he had first bid. And despite fierce opposition to taking on any Pan Am liabilities, Delta wound up assuming $749 million in obligations and agreeing to finance a smaller, ongoing Pan Am focused on Latin America. Delta does get Pan Am's European routes, its shuttle, and its Frankfurt hub--assets key to keeping pace with rivals American Airlines Inc. and United Air Lines Inc. internationally. But in uncertainty alone, the cost was high.

MAGIC ACT. Delta's rich price was a direct result of Icahn's uncanny knack for pulling credibility out of a hat. Despite his status as chief of an embattled airline in the throes of arranging its own recapitalization, Icahn crafted a last-minute, $1.4 billion bid with impeccable credentials: $400 million in cash from United and American, the nation's two largest airlines. Icahn knew that neither wanted to pick up Pan Am's liabilities or keep its employees--requirements demanded by Pan Am's creditors. So he agreed to take on the bulk of the liabilities himself, luring United and American with a vow to sell them various European assets after the deal was done.

To fend off its three rivals, Delta upped its bid. A lot. It agreed to a package valued by Pan Am and its creditors at $1.37 billion in cash and assumed liabilities. The creditors figure the deal should return them 10~ per dollar of claim, maybe 15~. Not much, but it beats a prognosis of zero return when Pan Am first filed bankruptcy.

While Delta agrees the creditors will get $1.37 billion, it insists that its bid will amount to less than $600 million in actual cost over the long term. Here's how it works: Delta's total cash outlay will be $621 million. Of that, $416 million will pay for European routes, the shuttle, 40 jets, and a slew of spare parts. Delta will also pay $50 million for a 45% stake in the new Pan Am, while accepting a $155 million note from the new company.

Meanwhile, Delta will extend $100 million in credit to the new Pan Am and give the reorganizing company an $80 million loan. It will assume $360 million in liabilities associated with Pan Am's participation in the U. S. Air Force's Civil Reserve Air Fleet (CRAF), $100 million in outstanding ticket liabilities, and $70 million in miscellaneous liabilities. Finally, Delta said it would cover any Pan Am loss over $140 million between Aug. 12 and Dec. 1, to a limit of $100 million.

To cut the $1.4 billion total below $600 million, Delta told analysts it could resell $50 million of the spare parts and take care of about half of the $100 million in ticket liabilities on its own flights. As for the $80 million loan, that must be paid back under bankruptcy law. All that sounds reasonable. But take a look at the other items in Delta's calculations.

TICKET SALE. As for the loss guarantee, Delta is betting that more certainty about Pan Am's future will increase traffic and help stem a flow of red ink that neared $100 million in June and July alone. To entice passengers, Pan Am Chairman Thomas G. Plaskett has launched a 25% sale on all tickets. Delta has told analysts it won't have to make good on its guarantee. That seems optimistic given that June and July are two of the carrier's strongest months, and Delta is on the hook for almost four months in a slower season.

Delta also assumes that the new Pan Am--a smaller carrier pitted directly against American in Latin America--will pay back the $155 million note and whatever it uses of the $100 million line of credit. But since Delta at first had no interest in the Latin America division, its potential is unclear. And for Delta to avoid paying the $360 million CRAF liability, the new company will have to fly the 12 Pan Am 747s devoted to the CRAF program. Old and ill-suited to the Latin American routes, they won't do much for the new Pan Am's profits.

Delta also must worry about training 6,600 new workers and the costs of developing the new routes. That is, those it can keep: Northwest Airlines Inc. may persuade regulators to force Delta to give up a Detroit-London route it covets.

In any case, the deal surely jump-starts Delta's slow push into Europe, while adding $1 billion in fresh revenues immediately. Thanks to Carl Icahn, Delta has paid dearly for the chance.

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