NEW YORK -- There was much to catch up on when the Eastern Air Lines board of directors sat down last month to its regular quarterly meeting in a conference room overlooking Rockefeller Center. The airline had lost $121 million between January and June. Its market share was declining. Its safety image had been threatened by a Federal Aviation Administration investigation. In Washington, a federal court had blocked the airline's latest attempt to lay off thousands of workers. Bitter union negotiations remained bogged down despite the efforts of a federal mediator.
As the directors proceeded through their agenda, Frank Lorenzo, the gaunt, intense chairman of Texas Air Corp., which had bought Eastern two years earlier, mentioned, almost off-handedly, that the sale of Eastern's prized Air Shuttle was under consideration. But according to several directors in attendance, he didn't name any particular buyer or discuss a price. Some of the directors, Lorenzo knew, were reluctant to part with the only remaining Eastern operation that was consistently profitable.
"I had a personal talk with Lorenzo after the meeting," recalls Roswell Gilpatric, a partner at the New York law firm Cravath Swaine & Moore. "He said there was nothing specific... . It was all in the rumor stage."
In fact, the sale of the shuttle was already well under way.
Just three days earlier, on Sept. 13, Lorenzo had met in the same Spartan ninth floorconference room with billionaire developer Donald Trump and a few of their top lieutenants. On that Tuesday afternoon, they already had a draft of a contract under which Trump would buy the shuttle for $365 million in cash. Although several items remained to be resolved, Trump and Lorenzo believed they had a deal working, and shook hands.
The sale of the Eastern Shuttle brought together two of the most aggressive dealmakers of the acquisitive '80s while a third -- TWA chairman and corporate raider Carl C. Icahn -- circled the transaction, conducting quiet negotiations of his own. Were it an action-adventure film, the deal might have been titled "Rambo Meets King Kong and Jaws."
All three of the saga's ambitious principals had grown up in Queens before moving on to Ivy League colleges and the Takeover Wars.
Lorenzo, 48, had long been entranced by aviation -- his boyhood bedroom is said to have been decorated with airline posters -- and had assembled an $8 billion airline empire, including Eastern, Continental and his own Texas Air.
Icahn's interest was more clearly financial: While buying into and selling out of various undervalued corporations, he'd outmaneuvered Lorenzo in 1985 to take control of TWA. Now, at 52, he was looking to expand its territory.
Trump, the youngest (42) and richest (net worth: $1 billion, according to Forbes magazine) of the boys from Queens, had not previously been involved in aviation, unless one counts the helicopter and a 727 he used to commute between his various vast homes and his casinos in Atlantic City. But Trump liked acquiring properties with cachet. New York's storied Plaza Hotel, purchased earlier in the year for $400 million, fit the bill -- as did the shuttle, with its connotations of political and financial power.
It was at the Plaza, less than a month after that conference-room handshake, that the 55-page, single-spaced "Shuttle Purchase and Sale Agreement" was signed. Lorenzo, asked at the ensuing press conference to describe how the deal had come about, said he preferred to discuss "the marriage that we've announced and not all the things that went into the courtship."
Subsequent interviews with Lorenzo, Trump and more than a dozen other participants, however, indicate that the courtship was brief but fevered and once seemed nearly undone by the approach of Icahn, the alternate suitor. The marriage is not completely assured -- Eastern's unions are in court attempting to stop the sale -- but industry analysts believe it will be consummated.
This is the story of how the Eastern Air Shuttle -- which began flying 27 years ago and annually carries 3 million passengers between New York and Washington and Boston -- became the wings of Trump.
Breakfast at the Plaza The roots of the deal go back about a year, to an earlier Eastern attempt to sell the shuttle. Texas Air Corp., the Lorenzo-controlled holding company that owns the airline, had decided to create a separate subsidiary that would buy the shuttle (without its 17 aircraft) and give Eastern a much-needed infusion of cash. Near bankruptcy when acquired in 1986, Eastern had bled another $182 million in 1987. Looming as well was a possible strike by Eastern's three powerful unions, which saw in the proposed shuttle spinoff an attempt to loot Eastern of a prize asset and then fold the rest into Continental Airlines, Texas Air's nonunion subsidiary. Two of the unions brought suit to stop the sale, and although Texas Air eventually prevailed on appeal, Lorenzo announced in July that he was dropping the plan.
Unknown even to some of Eastern's directors, Donald Trump had been one of the investors offered a minority interest in the proposed shuttle subsidiary. Trump had crossed paths with Lorenzo at various Manhattan socio-charitable events. When the shuttle spinoff fizzled, Trump recalls telling Lorenzo: "If you ever think of selling the shuttle, I'm interested in buying it."
Lorenzo took him up on it. "You sort of drop back and say, who is a logical buyer?" he explains. "Donald Trump likes things that are uniquely New York... . It was a very logical fit." Trump offered other advantages: He did not own a competing airline and he had deep enough pockets to handle a cash deal quickly. One morning in August, over breakfast at the Plaza, the haggling began.
"We may have talked $425 million," is how Lorenzo characterizes the price he initially asked for the shuttle, including its 17 planes -- a figure based on earlier offers and the calculations of investment bankers. Trump countered with an offer of roughly $350 million, about five times the shuttle's annual cash flow. By early September, they'd met at $365 million, much of which Trump was likely to borrow from Citibank.
The Sept. 13 meeting at Eastern's Rockefeller center offices -- a utilitarian complex very different from Trump's marble-floored command post up Fifth Avenue at Trump Tower -- brought together most of the major negotiators. Lorenzo was accompanied by Kevin Moore, the boyish-looking 33-year-old he had installed the year before as president of Jet Capital Corp., the closely held investment company through which Lorenzo controlled Texas Air. They showed slides of the shuttle's new food-paks and its attendants' new blue uniforms. Watching and listening with Trump were his chief financial officer, Harvey Freeman, 50, and Jonathan Bernstein, a partner in Dreyer and Traub, Trump's principal law firm.
Though Lorenzo and Trump grew up a few miles apart in Queens -- Lorenzo in middle-class Rego Park, Trump in more affluent Jamaica Estates -- they are very different types. Trump, who spent part of his youth tramping construction sites with his developer father, grew up wanting to make a splash in Manhattan. Now that he has, he basks in press attention, claiming that it benefits his chosen "art form," dealmaking. He and his wife Ivana, their estates in Palm Beach and Connecticut, and their new yacht seem to appear constantly in glossy magazines. He has become a "Doonesbury" character, nattering on about "quality" -- a code word for shameless opulence. His book, subtitled "The Art of the Deal," has been riding bestseller lists for close to a year.
Lorenzo, far less wealthy, did not make Forbes' list of "the richest people in America" despite $787,476 in salary and bonuses from Texas Air last year. He is the son of Spanish immigrants; his father operated a beauty parlor. Despite his high profile, Lorenzo dislikes the spotlight and agrees to interviews infrequently. This may be because the 15-year process of building a tiny regional flier called Texas International into the world's second-largest airline (Aeroflot is said to be bigger) brought him repeatedly into conflict with unions, other business leaders and his own associates. He once felt called upon to tell a Newsweek interviewer, "I'm not Darth Vader." At the press conference that announced the shuttle sale, where Trump cracked jokes, Lorenzo engaged in a shouting match with reporters.
The Sept. 13 meeting at Rockefeller Center, however, proceeded calmly. Besides setting the purchase price, the two parties had also agreed that Trump would honor Eastern's existing union contracts, giving the 850 shuttle employees the option of joining the new Trump Air Shuttle. Described as an act of concern for Eastern's employees, this provision could also have the effect of insulating the sale from the lawsuit Eastern's unions were expected to file.
Among the sticking points were restrictions on Trump's freedom to resell the shuttle. Lorenzo wanted to prevent any new owner from selling the shuttle to a third party, particularly a competitor like American or United. He also wanted the new shuttle to continue to participate in Eastern's OnePass program for frequent fliers, thereby funneling shuttle customers to Continental and Eastern.
Trump, for his part, insisted that the agreement include all the assets necessary to operate the shuttle immediately after the deal closed -- from terminal gates to computer system access. "I didn't want to lease planes; I wanted to own planes," Trump says. "I wanted to own everything."
Neither demand proved a deal breaker. Lorenzo said he would take the proposal to his board, and the lawyers went to work. The Icahn Factor They call it "going into the trenches." When teams of attorneys begin negotiating corporate deals, the distinctions between business hours and leisure time, between weekdays and weekends, tend to fade.
On Sept. 29, attorneys from Hughes, Hubbard & Reed (representing Eastern) and from Dreyer and Traub (for the Trump Organization) had their first formal session in a windowless conference room at Hughes, Hubbard's offices at One Wall Street.
Participants say that the shuttle negotiations were distinguished neither by particular acrimony nor by the closeness that sometimes develops when people are thrown together nearly around the clock. "It was mostly businesslike," says Mark Mazo of the Washington firm of Crowell & Moring, which provided regulatory counsel to Dreyer and Traub. The sessions, he complains, suffered from "a depressing lack of jokes." Jonathan Bernstein, leading the Trump forces, opened several sessions with baseball trivia questions and was dismayed to discover that "no one got any of 'em. I had to give major hints."
Negotiations proceeded for a week. The purchase document was repeatedly redrafted and reprinted. At midnight on Oct. 4, the lawyers sang a brief chorus of "Happy Birthday" to Tom Schueller, head of the Hughes, Hubbard team, who would turn 52 that day. "There were about 35 seconds of general merriment, and then we went back to work," Mazo recalls.
They were close to the final document. Then, on the morning of Thursday, Oct. 6, Bernstein got a call from an agitated Donald Trump.
The Dow Jones News Service had sent a headline over its "ticker" at 10:06 a.m. that read: "Texas Air (Tex): Icahn, Lorenzo Discussing Sale of Eastern." It was followed shortly by a report that the two airline magnates had discussed "the sale of all of Eastern Airlines to TWA." Trump sounded "mad, real mad," Bernstein recalls. "His words were probably unprintable." Was Lorenzo wasting the time of $300-an-hour attorneys? Or hoping to prompt a bidding war? "It seemed to us that we were being strung along," Bernstein says.
Bernstein called Jet Capital president Kevin Moore and Eastern counsel Barry Simon and asked for unequivocal assurances "that we're not negotiating with you while Frank Lorenzo negotiates with someone else."
When a couple of hours passed without the strong response he wanted, Trump decided to halt the talks. Bernstein went into the conference room where his associates and the Hughes, Hubbard lawyers were poring over the document yet again and announced the news to the surprised group. "We're stopping right now until we get this cleared up," Bernstein remembers saying.
A source familiar with Icahn's negotiations confirms that the financier (who is the largest shareholder in both TWA and Texaco and is worth $940 million by Forbes' estimates) had been talking with Lorenzo since at least early September. Icahn had also begun meeting with representatives of Eastern's unions, whose concessions would be central to an Icahn deal. Machinists' president Charles Bryan spent Sunday, Sept. 25, at Icahn's Tudor mansion in Westchester County.
As Icahn's interest became public, Trump decided he would take no chances. Negotiations stalled. "The deal," Bernstein recalls, "was in extremis." 'An Offer We Couldn't Refuse' Or was it? "One thing had nothing to do with the other," says Lorenzo. In a telephone conversation that night, according to a source close to the negotiations, Lorenzo assured Trump that Icahn was negotiating for the rest of Eastern. Trump ordered his top negotiators back to the table, and by the end of an eight hour session the next day, the deal was back on track.
Several participants say they always saw the breakdown as normal fang-baring. "A deal's not a deal until each party walks away from the table at least once," says one. In any event, the lawyers reconvened on Saturday and were directed to produce a document ready for signing on Wednesday, Oct. 12. A press conference was set for that day at 10:30 a.m.
Eastern's board was summoned to New York for a special meeting Tuesday afternoon. The proposal they voted on locked Trump into the OnePass program for at least three years. It also prohibited him from reselling the shuttle for five years, or from selling to a competing airline for 10 years (giving Eastern a right of first refusal for five years in each case).
What the board found most persuasive, however, was the price. Just last winter, Eastern's own investment bankers had called $225 million a fair price for the shuttle without its 17 planes, which were worth an additional $75 million. Now Trump was offering $365 million for the shuttle with its planes. Eastern board member and president Philip Bakes later said the purchase represented a $240 million capital gain for Eastern.
The Trump premium may not have been as hefty as it looked, however. The earlier valuation had been depressed by the stock market crash; since then, shuttle fares and profits had risen. In addition, by selling rather than leasing the planes to Trump, Eastern was giving up a guaranteed annual income of about $15 million to $20 million, according to analyst Timothy Pettee, who was hired to crunch numbers for Trump).
Still, Trump's was hardly a deal to walk away from. "There was no sense of elation about it at all," says board member Gilpatric. "Considering the need for Eastern's liquidity, this was an offer we couldn't refuse." The board's vote was unanimous.
Meanwhile, the lawyers' final "page-turner" -- the line-by-line review of the purchase document -- was running into the wee hours at Dreyer and Traub's Park Avenue offices. There was a last-minute question of how to comply with New York State sales tax law, and a long discussion of how to phrase an additional "condition precedent" regarding the closing. By 3 a.m., they were roughly half-way through. Now and then Barry Simon or Kevin Moore would enter and exhort the troops to hurry. They finished at 9:30, an hour before the press conference at the Plaza was scheduled to begin.
Simon sent downstairs for disposable razors and toothbrushes, and everyone washed up in the restrooms. The documents emerged from word-processing at 10:15. On the street, the negotiators found that the hired cars called to ferry them to the Plaza were late. Roger Thomas, the Dreyer and Traub associate who was carrying copies of the agreement in a legal file folder, commandeered a colleague's hired car and, with several associates, headed uptown.
The driver was listening to an all-news radio station on which, every few minutes, an announcer was declaring that an agreement to sell the Eastern Shuttle had been reached. At 10:28, the increasingly frantic lawyers heard him say that the press conference would begin in two minutes -- and the Plaza was still five crowded blocks away. "How can they sign?" Thomas yelped. "We've got the documents here!" The driver began leaning on the horn and jumping traffic lights.
The signing -- in Ivana Trump's salmon-pink office at the Plaza -- was almost anticlimactic. Eastern president Bakes and Trump affixed their signatures. There was no time for ceremony or celebration. Trump and Lorenzo accepted congratulations and went directly downstairs to meet the press.
Someone had set up a sleek model jet on a tripod next to the podium. It was striped with maroon and black and its tail said "Trump." Postscript Two days later, Eastern's machinists' and pilots' unions went to federal court to try to block the shuttle sale, scheduled to close on Dec. 15. It was only the latest in a series of 31 lawsuits filed by labor against Eastern since May 1986. "Eastern without the shuttle, what've you got left?" said machinists' union vice president John Peterpaul.
Icahn has ended his negotiations, but the unions still hope to deliver an intact Eastern to another buyer. "If Lorenzo was willing to sell to Icahn," says a source familiar with those negotiations, "he's willing to sell to someone else."
Lorenzo calls the sale "a very important shot of capital for Eastern." It also builds the war chest he would need in a union showdown. He insists he intends to keep the rest of the airline flying. "Our goal remains unchanged," he told skeptics at the press conference. "Our goal is to build Eastern Airlines."
Trump, who can wax rhapsodic about his plans for "immaculate" planes flying on time, has noticed that ridership on his new airline dips on weekends and that Atlantic City, where he owns two casino/hotels and expects to acquire a third now under construction, annually attracts 32 million visitors, very few of whom arrive by plane. It also has a large, underutilized airport. "Flying people in would be an interesting concept," he said at the press conference.
A week after the sale, he was still flying. "I like buying Mona Lisas; the shuttle is the single finest asset in the airline industry, the best," he proclaimed. "I like collecting works of art. This is a work of art."