MONTGOMERY, Ala. - The Alabama state pension fund's successful bid to buy a chunk of US Airways Group Inc. is a "deal made in heaven" for David Bronner.
Mr. Bronner, chief executive officer of the $25 billion Retirement System of Alabama in Montgomery, is known for his offbeat investment style. He spearheaded the pension fund's $240 million bid to buy 37.5% of the financially strapped airline. A federal bankruptcy court in Alexandria, Va., approved the bid Sept. 26. In the process, he squeezed out rival bidder Texas Pacific Group, a private equity firm that many thought was a shoo-in to become part owner of US Air.
"You can't get any decent returns from stocks or bonds," Mr. Bronner said in an interview with Pensions & Investments. "So you can either sit on your cash or find something else, and this is a terrific opportunity for the Alabama pension fund."
Doing the groundwork
Noting that TPG and US Air President Dave Siegel had already done the work required to get all the parties involved to make concessions and cut costs, Mr. Bronner said, "There's nothing better than having an LBO firm do all the groundwork in one of these transactions."
David Bonderman, head partner of Texas Pacific, has figured out how to use the bankruptcy laws to his firm's advantage, and Alabama will benefit from that, Mr. Bronner said.
US Airways management at first rejected the Alabama offer, but then reversed itself, explaining that Alabama pension executives shared US Air's interest in a labor-friendly restructuring and were supportive of current management.
Texas Pacific Group, meanwhile, bowed out, allowing US Air to terminate its agreement with TPG so the airline could pursue the higher bid.
Mr. Bronner prefers making direct investments like this one.
"That way, I'm making the decisions and saving the fees, rather than investing through private equity funds, because then they're making the decisions and choosing investments we might not want," he said.
The state pension fund's direct investments include a $140 million investment in 1992 to develop the Robert Trent Jones Golf courses in Alabama and a $2.5 billion investment in Raycom Media Inc., Montgomery, in 1996. The retirement system has built Raycom from six small television stations to 34 stations operating in 18 states today.
Once a deal is completed, Mr. Bronner leaves it to the company's management team to run the business and report to him every quarter.
"I only change management if there's a problem," he said. "Heck, these guys running these operating companies make a lot more than I do, so I let the pros do their work. Mainly, we leave them alone, unless there's trouble somewhere. We don't want to run 150 daily newspapers or 22 golf courses."
In US Air's case, it means Mr. Siegel will continue to be in charge.
"He's the best thing I've got. I'm blown away by him, and I rarely say that. He's gotten the unions to agree to $900 million in cuts in labor costs over the foreseeable future, which will reduce their biggest expense to 35% of revenues from the current 50% of revenues."
The unions also agreed to use smaller jets for many routes, another important cost-saver, Mr. Bronner added.
As part of the agreement, the bankruptcy court also approved $400 million in interim debtor-in-possession financing that Alabama will supply.
Doing the math
"We could earn an estimated return of $1 billion over five to seven years on the investment. It's only going to cost us a little over $200 million. Even if we earn less, we would still come out ahead," Mr. Bronner said.
"The airline industry has been in a dither, but it's cyclical, like durables. No one wants it right now because it's been beaten down, but it will turn around once we get through with Iraq," he predicted. Mr. Bronner said he felt compelled to step into the bidding, even though it meant competing against TPG's Mr. Bonderman. He made his name successfully restructuring airlines beginning with the turnaround of Continental Airlines Inc. in the early 1990s, followed by the turnaround of America West Airlines.
"It was an opportunity that was too good to ignore. And it opened up the bidding process.
"We hired our own experts to help us understand the industry," Mr. Bronner said. They include Rono Dutta, former president of UAL Corp., who is serving as a consultant on the deal along with investment bankers Houlihan Lokey Howard & Zukin and New York bankruptcy lawyers Orrick Herrington & Sutcliffe.
Alabama is no stranger to the airline business. "We've been in the business 20 years, investing in airline debt and getting returns ranging from 9% to 15%, depending on when we made the investments" he said.
The pension system owns around $1 billion in equipment trust certificates in all of the major airlines - Delta Air Lines Inc., American Airlines, US Air and United. The certificates help the airlines finance the purchase of airplanes and equipment, which become Alabama's collateral. The investment includes $340 million worth of US Airways trust certificates, from which Alabama already has earned $501 million, a return in excess of 11%, Mr. Bronner said.
Not taking advantage
The agreement with US Airways also calls for a restructuring of the trust certificates, and Mr. Bronner said Alabama will agree to whatever terms the other creditors set so it won't be seen as taking advantage of its position.
Not all pension executives would do what Mr. Bronner does. One called it "a crazy idea."
The executive, who requested anonymity, said: "Most businesses are very complex and pension funds don't know how to run them. ... Even if you hire experts to run the business, if the pension fund owns a 37% stake, it needs to know something about it."
Mr. Bronner, meanwhile, said he isn't looking for the big bucks that many corporate executives earn. He recalled, for example, being introduced before a speech at a local Rotary Club. The host noted Mr. Bronner and Warren Buffett had started in the investment business around the same time, and that both had made a lot of money.
"The big difference, the host said, was that Warren did it for himself and his friends while I did it for the state of Alabama. So Buffett is a lot richer than I am. But it doesn't bother me. I'm rich enough," Mr. Bronner said.