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KLM pays out excess cash
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May 4, 1999: 9:52 a.m. ET
Shareholders to get about $423M under airline's capital redemption plan
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LONDON (CNNfn) - Shares of KLM Royal Dutch Airlines jumped more than 8 percent in Amsterdam Tuesday after the carrier disclosed a plan to reduce its total capital by 25 percent through a one-time payout to shareholders valued at roughly $423 million.
KLM said it decided on the combined share-trimming and capital redemption plan as a cost-effective way of ridding its balance sheet of a swelling cash surplus.
The share reduction, effectively structured as a 4-for-3 reverse share split and capital reduction, entails a payout of 7.10 euros, or about 15.65 guilders ($7.52). That amounts to 25 percent of the company's stock closing price May 3.
The excess liquidity was set to grow further following the sale of part of KLM's stake in data communications firm Equant and the expected sale of its interest in airline booking system Galileo International.
KLM holds 10.6 million shares of Galileo, which has been listed on the New York Stock Exchange since 1997.
Assuming the entire stake is sold, KLM said, its liquidity will jump by "well over" 1 billion Dutch guilders ($480.6 million). KLM reaped about $125 million from selling its stake in Equant.
Rob Abrahamsen, KLM's chief financial officer, said Tuesday KLM had considered several available options for dealing with the surplus.
"By reducing the number of shares outstanding, the cost of capital will be lowered and the capital structure therefore will be further optimized," Abrahamsen said. After the reduction, he noted, KLM will have cut the number of ordinary shares outstanding by almost 50 percent, to 46.1 million, in less than three years.
He said KLM still will have a "strong balance sheet and ample liquidity" after the transaction.
Andre Mulder, an analyst with Metzler Nederland B.V. in Amsterdam, said KLM's developing alliances with other airlines limited its options. The company holds stakes in carriers in the Netherlands, Norway, Kenya and the U.K. and maintains a code-sharing agreement with Northwest Airlines.
"As alliances are still developing, they feel that they don't have any short-term opportunity to use this cash," Mulder said.
He said the estimated 400 million euro ($423.6 million) share reduction may have been a bit high, given that KLM's financial ratios don't differ much from those of its competitors.
Nonetheless, he suggested other cash-disposal plans may have seemed less viable: an outright stock buyback would have put even greater pressure on ratios, he said. A debt redemption, on the other hand, would have proven costly since most of KLM's debt is structured as long-term or lease constructions.
The payout is structured in way so as not to be subject to Dutch income and dividend tax. Under the plan, part of the share premium account will be converted into nominal share capital, which will in turn be reduced through the 7.10 euro per-share redemption.
KLM said the transaction is contingent on the sale of the Galileo stake, expected this quarter.
"The capital redemption and the share reduction could be reduced in size if the sale of KLM's stake in Galileo fails to raise the amount expected in view of current market conditions," KLM said.
The airline said it will submit the plan for shareholder approval at an annual general meeting August 3. If approved, the scheme will go into effect within two months after the meeting.
KLM shares were up 8.27 percent at 30.75 euros in Amsterdam Tuesday, just below their year-high of 30.80. 
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KLM
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