Institutional investors are expected to easily approve UAL Corp.'s employee buy-out plan at its annual shareholder meeting Tuesday, even though the company's second largest shareholder has given it a thumbs down.
John Neff, manager of Vanguard Cos.' Windsor Funds Inc., already voted against the plan, a spokesman for Vanguard, Valley Forge, Pa., said. The Windsor Funds own approximately 10.99% of the 24.4 million outstanding shares of the Chicago-based parent of United Airlines.
Mr. Neff had slammed the plan's dilution of shareholders' ownership in recent weeks. UAL sweetened the terms of the buy-out to give employees 55% ownership in the company, instead of the 53% initially proposed.
But UAL's largest shareholder - Alliance Capital Management L.P. - is expected to vote for the buy-out, a source close to UAL said. New York-based Alliance owns about 17% of the company.
The source also said Sanford C. Bernstein & Co. Inc., New York, with an estimated 6.7% ownership, is expected to approve the plan.
Officials at both Alliance and Sanford C. Bernstein wouldn't comment.
Several large pension fund investors also have decided to affirm the plan, including the $78 billion California Public Employees' Retirement System, Sacramento; the $37 billion Florida State Board of Administration, Tallahassee; and the $50 billion New York City Retirement Systems.
Since the buy-out causes dilution to the investors' holdings, their approval is testimony to savvy shareholder outreach efforts by UAL and its proxy advisers.
Gerald M. Greenwald, incoming UAL chief executive and until now consultant to many of the company's employee groups and unions, visited several large institutional holders during the past month to ensure their approval of the plan.
Among those Mr. Greenwald visited were Eric Wollman, director of corporate governance for the city of New York. A UAL spokesman confirmed Mr. Greenwald visited several large shareholders but declined to identify them.
"It appears that the plan, as put forth, has a good chance to succeed," said Luther Jones, manager of corporate affairs with the Florida system. Last week, it voted its 568,900 shares (2.3% of UAL's outstanding shares) in favor of the plan.
"We were strongly influenced by our investment management adviser, Alliance, which has a strong stake in the issue," he said.
His sentiments were echoed by Jon Lukomnik, deputy comptroller for pensions for the city of New York. "This was a thoughtful plan to reconfigure the cost structure of the carrier. We would love to have that plan without the dilution it entailed, but .*.*. this was the best option available to us," he said.
The New York system owns 145,144 of UAL shares valued at $18.4 million, Mr. Lukomnik said.
Meanwhile, the California Employees' fund, which has 181,400 UAL shares in its investment portfolio, late last week also decided to uphold the plan, said Jose Arau, principal investment officer.
Little wonder then that sources say UAL officials expect approval of the proposal by a wide margin.
The transaction must be approved by owners of a majority of outstanding shares to pass.
The transaction also has received a big boost from reports by consulting firms - including Institutional Shareholder Services Inc., Bethesda, Md. - recommending approval of the plan.
A June 29 report by Michael W. Derchin and Hence Orme, airline analysts at NatWest Securities, New York, also recommended shareholders vote for the plan because "it offers the quickest way to reduce costs significantly, turn around short-haul operations and get labor's cooperation."
Mr. Orme suggested pessimists of the plan's success have already jettisoned the stock, leaving ownership in the hands of those who are bullish on the prospects of financial restructuring through the employee buy-out. "We think most people who hold it now, and bought it in the last month or so, support it," he said.
Additionally, proponents of employee stock ownership plan suggest the proposal will easily pass because "they realize the airline industry is a sick industry and they will vote for any comprehensive plan that will bring immediate profits to the airline," said Joseph Blasi, a professor of labor-management relations at Rutgers University and an ESOP expert.
Mr. Blasi expects approval of the plan "by a modest margin."
Mr. Blasi also pointed out UAL has succeeded in quashing most criticism. For example, he noted employees will not control the company's board of directors as some market analysts had feared; employees have only three of the 12 seats on the board.
He also dismissed the notion that employee ownership on such a large scale "is an untried idea," pointing out that there are about 1,500 companies with significant employee ownership that are publicly traded. And finally, he said, the question of dilution of current holdings is "a straight up and down choice," meaning some shareholders clearly are willing to accept dilution in exchange for a more efficient company with lower labor costs and greater operating flexibility.
In fact, approval of the buy-out should give an impetus to a similar financial restructuring by Dallas-based AMR Corp., parent of American Airlines, Mr. Blasi suggested.
"All that American needs to demonstrate to its shareholders is that this is a credible option," Mr. Blasi noted.