By Michael Flaherty and Alwyn Scott
(Reuters) - Two investment funds with significant stakes in United Continental Holdings Inc (N:UAL) nominated a slate of six directors for the airline's board, increasing the chances of a proxy fight as the company digs in to defend against the attack.
PAR Capital Management Inc and Altimeter Capital Management LP, which together own 7.1 percent of United, said on Tuesday that they were disappointed with its "poor performance and bad decisions over the last several years."
The Boston-based asset managers have experience in investing in travel businesses but no track record of starting the kind of proxy battle typical of so-called activist investors.
Former Continental Airlines Chief Executive Officer Gordon Bethune led the dissidents' slate, which includes Altimeter founder Brad Gerstner and former Orbitz CEO Barney Harford, the investors said in a statement. Gerstner was on the Orbitz board when Harford led that company.
Shareholders have until Saturday to submit board nominations for the annual meeting, which is expected to take place in June.
United was quick to respond, saying it had tried to work with the two investors to discuss the nominations and even offered to amend its bylaws to extend the deadline. The company said the investors were "uninterested" in an agreement.
United Continental shares were down 1 percent at $57.06 in midday trading.
The two funds built stakes last year, and talks with United intensified in late 2015, a person familiar with the matter said. United disclosed in January that the funds had built up a combined 5.5 percent stake.
SERIES OF PROBLEMS
"This situation is really all about shaking up what Altimeter/PAR thinks is an entrenched and ineffective board," said Don Bilson, head of event-driven research at independent research firm Gordon Haskett.
The 2010 merger of United and Continental created the second-largest United States airline by capacity. But the company has suffered from a string of problems.
Software glitches plagued its reservation system for several years. Employee morale remained low, and United failed until recently to substantially lift its on-time performance.
The company lost $724 million in 2012, while rival Delta Air Lines Inc (N:DAL) posted earnings of more than $1 billion. For 2013, United earned $539 million, and Delta's profit reached $10 billion.
Former United Chief Executive Jeff Smisek stepped down in September following the disclosure of a federal investigation into the airline's dealings with the Port Authority of New York and New Jersey.
The fund's plan to change United's board comes two days after the airline said CEO Oscar Munoz would return to the company on March 14 after being on medical leave since October, when he suffered a heart attack.
"PAR and Altimeter have unilaterally taken this hostile action with no concern that a proxy fight could distract the company from executing on Oscar’s strategic plan," United Non-Executive Chairman Henry Meyer said on Tuesday.
United said on Monday that it had added three independent directors to its board, increasing the size to 15. The company said some directors would step down but declined to say which ones or how many.
The asset managers have not disclosed their view of Munoz. The board changes, together with an increased stock buyback plan, were not enough to persuade the funds to back down.
"Yesterday's last-ditch effort – adding just three people to its now 15-person board – is a cynical attempt to preserve power by this entrenched board," Gerstner said in a statement.
Activist shareholders, whose biggest names include Carl Icahn and Nelson Peltz of Trian, started a record 385 campaigns last year, Thomson Reuters data shows. They were supported by large institutional investors' desire for shake-ups of publicly traded companies' management and boards.
The list of activist shareholders has added funds that have not historically launched campaigns but now feel empowered to take their case for change to other shareholders of their target companies.