Hawaiian clear winner in planned airline merger

By Susan Hooper
Advertiser Staff Writer

Hawaiian Airlines chairman John Adams and his affiliated companies will be the financial winners if the carrier's merger with Aloha Airlines goes through, receiving assets valued at about $109 million, or almost twice as much as Aloha stockholders get.

In the planned merger, Adams, his New York investment firm Smith Management LLC, and his Airline Investors Partnership will collectively receive cash and notes valued at an estimated $53 million.

Adams, who trades in his 18 million shares of Hawaiian stock, and Smith Management also get 19 million shares in the new company. That amounts to approximately 28 percent of the merged airline, an asset worth an estimated $56 million.

Under terms of the merger, the shareholders of privately owned Aloha Airlines — many of them relatives of the company founders — also get 28 percent of the merged airline, worth an estimated $56 million.

The proposed compensation for the airlines' owners was made clear last week as part of a shareholder document filed with the federal Securities and Exchange Commission. The document does not detail how the compensation was determined, but an airline expert said yesterday that while Adams' share of the deal might seem high, it likely reflects the larger size of Hawaiian Airlines and the experience and investment Adams brought to the carrier six years ago as it was struggling to survive.

Hawaiian Airlines spokesman Keoni Wagner declined to comment on the contents of the shareholder document, known as a proxy statement. Adams could not be reached for comment. Aloha Airlines spokesman Stu Glauberman said Aloha officials cannot offer additional comments on information in the proxy.

Estimates of asset values are based on a number of variables, such as Hawaiian Airlines' closing stock price Friday of $4.01 a share and its 34 million outstanding shares, plus the value of the combined company, estimated at about $200 million. (The stock market was closed yesterday for the Presidents' Day holiday.)

Fredrick Collison, professor of transportation and marketing at the University of Hawai'i School of Travel Industry Management, said the airlines' value could be estimated through its revenues.

In 2000, the last year for which figures are available, Hawaiian had operating revenue of $607.2 million, while Aloha had operating revenue of $315.5 million, about half that of Hawaiian.

For the first nine months of 2001, Hawaiian had operating revenue of $470.5 million, versus Aloha's $255.9 million — again, about half of Hawaiian's amount.

Another person who would gain significantly from a merger is Greg Brenneman, the former Continental executive leading the effort and owner of Texas consulting company TurnWorks. Brenneman and his company, which will consult with the new airline, would receive assets valued at a minimum of $42 million over two years if the proposed merger goes through.

Among the assets, TurnWorks would receive a 20 percent share of the new airline, valued at about $40 million, and a fee for two years of consulting work between $600,000 and $1.6 million a year, depending on Brenneman's position in the merged airline, according to the proxy statement.

Brenneman also would receive a minimum base salary of $400,000 annually for two years, "or such other amount agreed to by the board," and several benefits, according to the proxy.

A spokeswoman said Friday that Brenneman could not comment on the contents of the proxy statement.

Collison said the compensation breakdown seemed reasonable.

"Bringing a third company in, they're going to want a fair amount of value for what they're doing," he said. "... In terms of the specific percentage they're getting, I don't know enough to judge that, but the fact that they're getting a fairly reasonable percentage of the company — that's not surprising at all."

With respect to Adams' share, Collison said, "You have to look at it from the standpoint of what people are bringing (to the merger).

"You can look at it that Adams came in and invested money when there was a real question whether Hawaiian would survive at that point," he said. For that reason, Adams could argue that he took a risk then and should get a return now, Collison said.

Adams has played a key role in Hawaiian's recovery since its emergence from bankruptcy protection in September 1994. His Airline Investors Partnership took control of Hawaiian Airlines in January 1996, paying $20 million for a 68 percent stake in the company and six of the 11 seats on the board. Adams became Hawaiian's chairman, replacing Bruce Nobles, who continued as president and chief executive officer.

When he joined Hawaiian, Adams was president of Smith Management and of Airline Investors Partnership, set up to invest in Hawaiian. Smith Management had a track record of turning around troubled companies.

Hawaiian held a public offering after Adams took over that reduced his share of the airline. He now holds 18 million shares, or about 53 percent of the total.

In the five years after Smith Management took control of Hawaiian, it showed record profit and offered its first employee profit-sharing. It also began flying new Hawai'i-Mainland routes.

Adams has considered selling his interest in the company for some time. In May 2000, Smith Management began talks with a potential investor, but they ended a month later, according to the proxy statement.

Hawaiian, founded in 1929, and privately held Aloha, founded in 1946, had discussed a merger off and on for years. Officials with both airlines said the possibility became more real after the Sept. 11 attacks, which sent the airline industry reeling from the drastic loss of business, and the interisland market suddenly far less capable of supporting two players.

The Aloha-Hawaiian merger has the support of Gov. Ben Cayetano and Hawai'i's powerful senior senator, Dan Inouye. But it has been controversial since it was announced.

Some Hawaiian shareholders have raised objections, and one shareholder lawsuit filed in January charges that the merger gives a "financial windfall" to Hawaiian's majority shareholder, Adams, at the expense of other shareholders. That suit, filed on behalf of all shareholders, seeks to halt the merger.

Under terms of the merger, all shares of Hawaiian common stock will convert to about 52 percent of the new company's shares, and also convert to a six-year, 8 percent note with a face value of $2.

Three other Hawaiian Airlines shareholders have filed class-action lawsuits in Hawai'i to stop the merger, charging that Hawaiian's board of directors breached its duty to other shareholders to obtain "millions of dollars of personal benefits."

It is not uncommon for shareholders of publicly traded companies to challenge mergers or acquisitions in an effort to ensure shareholders get the best deal.

All of the suits are pending.

Reach Susan Hooper at shooper@honoluluadvertiser.com or 525-8064.