EAGAN, Minn. - Northwest Airlines Corp.'s 44,000 employees could be flying high when they begin to cash in on the airline's amazing turnaround.
Northwest's stock offering, announced late last month, could raise $188 million in cash for the employees, who will soon get options to invest the proceeds.
That's because half of the stock to be sold will come from the employee stock ownership plan, which owns 25% of the company's stock. The ESOP was established when employees traded wage concessions for part ownership of the then-privately held company in 1992 to help keep the airline out of bankruptcy. The stock price has appreciated 300% since a 1994 IPO.
The sale of stock by an ESOP is unusual, but not unheard of, according to ESOP experts, who note the Northwest plan is not a typical ESOP.
Northwest filed a registration statement with the Securities and Exchange Commission Oct. 23 for a secondary offering of 8.4 million shares of class A Common stock, half owned by Bankers Trust Co., New York, and half by the Northwest Airlines Corporation Employee Stock Plan.
At the Nov. 3 closing stock price of $46.75 per share, the employees' 4.2 million shares would bring in $196.35 million. The SEC filing sets a $44.75 proposed maximum offering price per share, which would gross the employees $188 million.
Northwest set up voice response phone lines for employees to indicate how many shares they want to sell. The employees can take the money as a lump sum (after taking a tax penalty) or roll it over into an IRA or into a money market account set up to invest the proceeds temporarily until a range of options is in put place, said an investment banker familiar with the deal.
The ESOP plans to add investment options, including mutual funds, next June. The options will mirror the offerings of the company's 401(k) plan.
A Northwest spokesman refused to comment on any of the ESOP's plans, citing SEC regulations that bar the company from discussing the offering.
But the investment banker said it's not surprising that both Bankers Trust and the ESOP chose to sell the stock now. They accepted stock in a company that was essentially bankrupt, he said, and now the stock has bounced as high as $46.75 per share from a share price of $13 when the airline initially went public.
The ESOP will have 29.9 million shares when fully funded, of which approximately 14 million have been allocated to individual employees. Employees are limited to selling no more than 42% of the allocated shares, or approximately 6 million. But since not all employees will choose to sell, the offering is targeting 4.2 million shares, said the investment banker.
Until now, employees had not been able to sell their stock, other than through hardship withdrawals. After the secondary offering, there will be a blackout period lasting until April 1, after which employees will be able to sell shares in the open market subject to certain limitations.
Practical concerns keep most ESOPs from selling their stock, said Corey Rosen, executive director of the National Center for Employee Ownership, Oakland, Calif. A private company doesn't want to spend cash repurchasing shares, while a public company doesn't want to have too many shares in the market, he said.
The sale of stock by an ESOP is unusual, but not unheard of, said J. Michael Keeling, president of the ESOP Association, a Washington-based trade association of about 1,200 ESOP companies. Northwest is not a member.
"Clearly it is not a day-to-day event. It doesn't happen every week that all of the 10,000 ESOPs in America are just wheeling and dealing in their stock," said Mr. Keeling.
However, he added the trustee of an ESOP is within his or her legal rights to dispose of an asset if it is in the best interest of the participants. The ESOP doesn't need to be 100% invested in company stock, as long as the majority of its holdings are, he said. If the plan is not leveraged - as in the case of some ESOPs which borrow to acquire the stock - the only consideration is the prudence of selling the stock, said Mr. Keeling.
That argument could go either way, according to Mr. Keeling. The trustees could argue that the employees should realize some of the gains now, or they could say the stock has the potential to rise even more, he said.
Since Northwest "borrowed" from employees through pay cuts, then paid them back with stock, experts said it makes sense for the company to give something back to the employees while the stock price is high.
The bias in an ESOP is to hold the stock as long as possible, said Mr. Keeling. But he noted that giving the employees the choice to sell or not to sell is in keeping with the tendency of defined contribution plans to give more choices and pass on more control over those choices to the employee.
Northwest is not an ESOP in the purest sense, where the stock tends to stay in the plan until the employee leaves the company or is allowed to diversify after age 55, said Mr. Rosen. He noted it wasn't set up as a vehicle for employee ownership.
Still, the ESOP seems to have worked as expected in the case of Northwest, said Mr. Keeling. The airline was able to fight off bankruptcy and return to a measure of profitability, while giving the employees an ESOP that is worth more than it was before.
"In the world at large - both the aviation industry and employee benefit community - Northwest is a beacon of success," he said.