U.S. Approves Northwest Deal, Sets Conditions : Administration Insists That KLM Be Ordered to Halve Its Stake in Airline

WASHINGTON —  The Transportation Department announced Friday its approval of the takeover of Northwest Airlines but ordered a reduction of more than 50% in the investment in the new company by KLM Royal Dutch Airlines.

The Bush Administration, which is determined to avoid the prospect of foreign control of an American carrier, insisted on the changes in the structure of the complex buyout of NWA Inc., the parent company of Northwest.

KLM had been planning to contribute $400 million of the $705 million in equity for the buyout, which was organized by Los Angeles investor Alfred A. Checchi. The Transportation Department said the KLM contribution must be reduced within six months to $176 million, or 25% of the total equity. Loans are to supply the rest of the cash for the $3.65-billion takeover.

Checchi, who signed an agreement with the Transportation Department accepting the reduction in KLM’s contribution, did not indicate whether he has found additional investors to fill the gap. The details of restructuring the deal are up to Checchi, but he is expected to select American investors, a senior Transportation Department official said.

KLM, in a statement issued in Amsterdam, disputed the Bush Administration policy and said it “has therefore not signed the agreement.”

‘Shrinking Relative Interest’

Current law says foreign investors may own no more than 25% of the voting shares of an American carrier. The Northwest buyout already met this test. KLM and Elders IXL Ltd., an Australian firm also joining the investment, would control a total of 20% of the voting shares.

But the Transportation Department decided in this case also to limit the cash contributions of the foreign investors.

Because it was supplying so much of the cash, KLM “would be in a position to exercise control” over Northwest, the Transportation Department said in the consent order. The department fears that foreign domination of an American carrier could ultimately stifle competition by preventing movement into international routes.

Under Friday’s consent order, Northwest agreed to put KLM’s excess equity share under control of a U.S. trustee until it can be sold or otherwise disposed of, the Transportation Department said.

KLM’s “ability to influence Northwest would be significantly reduced by shrinking its relative interest,” the Transportation Department said.

The buyout agreement for NWA had also allowed KLM to name a three-member financial committee to advise Northwest on financial affairs and to appoint a member to the Northwest board, steps that would reflect “KLM’s financial interest” in any decisions by Northwest, according to the Transportation Department.

Friday’s consent order eliminates the financial committee and puts restrictions on the activities of the KLM director on the Northwest board.

“While we disagree with some of the department’s conclusions, particularly with respect to KLM’s investment, we are pleased to have reached an agreement which resolves DOT’s concerns,” Checchi, chairman of NWA and president of Wings Holdings, said Friday.

“We do not believe that KLM is, or has ever been, in a position to exercise any actual control over NWA,” he said. “At the same time, we do not believe it is in anyone’s best interests to enter into protracted litigation with the prolonged uncertainty and management diversion that would result.”

Proposed UAL Takeover

Checchi said he is happy that, despite a reduced ownership role, KLM will still be a business partner. “We cannot overstate our pleasure with one aspect of this agreement--it assures a long-term partnership with KLM, an airline known throughout the world for its record of exemplary service to its customers.”

In pursuing its concern about foreign investment, the Transportation Department earlier this week asked United Airlines to disclose the impact of British Airways’ participation in a proposed $6.5-billion employee takeover of the carrier.

Stephen M. Wolf, the chairman and president of UAL Corp., said Friday: “The action taken today by the Department of Transportation indicates that Secretary (Samuel) Skinner is carefully examining each transaction on its own facts. We are confident that the proposal for employee ownership of United Air Lines meets the concerns that the secretary expressed with respect to the Northwest transaction.”

UAL shares rose $4.50, to $282 a share, on heavy volume Friday on the New York Stock Exchange, with investors apparently encouraged by Skinner’s action in the NWA case.