Why is Alabama's pension plan trying to bail out US Airways?

Commentary about business and finance.
Sept. 20 2002 7:32 PM

The Fund That Roared

Why is Alabama's pension plan trying to bail out US Airways?

Thursday, a new and unlikely bidder for the corpse of bankrupt US Airways emerged from the financial backwater of Montgomery, Ala.

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The Retirement Systems of Alabama, a pension fund that invests on behalf of some 280,000 teachers, civil servants, and other public-sector workers in one of the nation's poorest states, offered $240 million in cash for a 37 percent controlling stake in the carrier. In so doing, the fund clambered into the ring with one of the leading and sharpest turnaround funds, Texas Pacific Group, which offered about $200 million for the airline back in August. Run by David Bonderman, a Washington lawyer who once tended to the personal horde of oil magnate Robert Bass, Texas Pacific has scored home runs with turnarounds including Continental Airlines, Oxford Health Plans, and Ducati.

It may seem odd that Alabama's teacher retirement fund would be dueling for control of a bankrupt company, but this isn't the first time that Dr. David Bronner, the manager-for-life of the Alabama fund, has gone to the mat. Bronner, who is one of the more idiosyncratic figures in the world of finance, has run RSA for nearly 30 years, building its assets up from $500 million to $25 billion. Appointed by the governor, Bronner serves as the state's emissary to the world of high finance—its banker, real-estate developer, and de facto economic development czar. He's Alabama's Donald Trump, Henry Kravis, Peter Lynch, and Warren Buffett rolled into one. Alabama papers refer to him as the Wall Street Wizard.

Bronner is arguably the most powerful man in the state, having tangled with—and outlasted—every Alabama governor since George Wallace. Most of the officials who run similar state pension funds are elected, and they're primarily politicians—like New York State Comptroller H. Carl McCall, who is now running for governor. Many fund managers are content simply to parcel out funds to outside money managers or to invest in broad indices. While much of RSA's funds are invested in stocks and bonds, Bronner has repeatedly engaged in entrepreneurial deals that he believes will produce returns and benefit the state.

Bronner has had the job since 1973, but it wasn't until the mid-1990s that he got RSA into the leveraged-buyout game. Bronner had been on the receiving end of several pitches from LBO artists—equity firms frequently raise a large portion of their funds from public employee pensions—and he figured he was smart enough to run the drill himself. And since he didn't have to incorporate the maintenance of Gulfstream jets, or the fancy artwork on the office walls, or the significant management fees that LBO funds charge into the cost of his deals, he believed he could make even more money for his constituents.Bronner, who runs his operation from a suite of offices in one of the RSA's Montgomery buildings, in 2000, received a salary of just $240,000.

Over the years, Bronner, who grew up in Minnesota, has done more to alter the landscape of a southern state than any northerner since Gen. Sherman. RSA has lent money to companies to finance the construction of plants throughout Alabama. In Montgomery, Bronner used RSA funds to build the Embassy Suites Hotel and a half-dozen office buildings, including the 24-story RSA Tower. Bronner's boldest move came when he committed $300 million to create a series of high-end public golf courses, known as the Robert Trent Jones Golf Trail. The courses are marginally profitable, but they have generated loads of tourism traffic and, for the first time, press coverage about golf in Alabama that doesn't revolve around whites-only clubs. The New York Times Friday "Escapes" section recently profiled the golf trail in glowing terms. "Probably the first time the Times has written something nice about Alabama since the 1930s," Bronner said.

In 1996, the RSA helped found a media company, Raycom; based in Birmingham, it now owns 36 TV stations and several sports-related businesses. The next year, he started Community Newspaper Holdings Inc., which has snapped up more than 200 small-town newspapers. As these companies expanded, Bronner began to encounter other buyout barons on the field of battle. In 1997, whenHicks, Muse, Tate & Furst—a leading leveraged buyout firm—struck a deal for LIN Television, Raycom came in with a higher offer. Bronner's entrance ultimately forced Hicks, Muse to jack up its bid significantly. "What the little old RSA did made more than $225 million for stockholders of LIN," Bronner said.

Now Bronner aims to do the same for US Airways' stakeholders.As a creditor—RSA has lent some $340 million to the airline to buy planes—Bronner believed Texas Pacific's $200 million investment lowballed the value of the company. (The bigger the offer, the more money there is to pay back creditors like RSA.) And the terms of the transaction—what Bronner dubbed "a good old boy deal"—stuck in his craw. US Airways CEO David Siegel had once worked as president of Continental's regional carrier, at a time when Texas Pacific was a major investor in Continental. The deal also called for Texas Pacific to receive between $7.5 million and $10.5 million in fees from US Airways.

By offering $40 more million in cash and by forgoing the fees, Bronner believes his offer will put nearly $50 million more into the hands of the airlines' creditors. If RSA assumes majority control, Bronner suggests, US Airways might expand service in Alabama beyond the four cities it serves there or locate maintenance or back-office facilities in the state. And he couches what may emerge as a bidding war in populist terms. "It's sort of a struggle between the arbitrage guys that have gazillions of dollars and a pension fund that represents 280,000 cops, firemen, little people."

Bronner tends to overdo this aw' shucks affect—after all, this is a guy with about twice as much money to invest as Texas Pacific has. But it's a useful pose, especially in a state where, after more than 30 years, this adapted Yankee is still regarded as a bit of an outsider. Back in 1981, Bronner committed what could be the ultimate sin for a person in public life in Alabama. He sued the state legislature to stop a sweetheart deal for legendary University of Alabama football coach Bear Bryant—and won. As recently as 1992, the Huntsville Times called him a "modern-day carpetbagger in the Cradle of the Confederacy." If Bronner succeeds in gaining control of the Pittsburgh-based airline, perhaps the locals will finally accept him as one of their own.

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