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Pan American World Airways - Iran
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Pan American World Airways - Iran
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Judith R. Hope Files (Ford Administration)
Judith Hope's Airline Subject Files
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The original documents are located in Box 17, folder "Pan American World Airways -
Iran" of the Judith R. Hope Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
CONFIDENTIAL
CONFIDENTIAL
OUTLINE OF TERMS AND
DISCUSSION OF BASIC ISSUES
At the request of the Iranian Government, Pan American has
asked the Administration to give public approval in principle
to a proposed $300 million Iranian investment in Pan Am.
Administration approval would in no way bind the CAB which would
also have to approve the transaction
Proposed Iranian Investment
The details of the proposed transaction are outlined in
the attached annex prepared by the Company and its investment
bankers. The principal terms can be summarized as follows:
1. Iran will make available $300 million to Pan Am;
2. $55 million of this amount will be used to acquire
55% of Intercontinental Hotels, an off shore hotel
chain now owned by Pan Am.
3. The remaining $245 million will be provided in the
form of a 10 year loan with a 10 1/2% interest rate
and a three-year grace period with respect to principal
repayments. There are provisions for accelerated
repayment at Pan Am's option.
4. The loan is conditional upon U.S. banks continuing
the current $125 million credit agreement and will be
secured pari passu with other senior debt. (Iran is,
however, willing to relinquish any collateral if U.S.
creditors agree to do likewise.)
DECLASSIFIED
E.O. 12958, Sec. 3.5
CONF IDENTIAL
NSC Memo, 11/24/98, State Dept. Guidelines
By with , NARA, Date 11/20/00
-2-
CONFIDENTIAL
5. About $190 million of the $245 million loan will be
used to acquire at discount at least 75% of $390 million
debt now held by institutional investors and $55 million
of the loan will be used to satisfy current cash needs
of the company.
6. Iran will also obtain warrants to purchase 6 million
shares of Pan Am which, if exercised, could give Iran
13% of the then outstanding equity. The warrants
would be transferable but no transferee could acquire
warrants to purchase more than 1% of the outstanding
shares without Pan Am approval.
7. Subject to CAB approval, Iran would nominate one
member of the Pan Am 17 member board.
8. The transaction would be subject to approval by relevant
U.S. regulatory agencies -- particularly the CAB.
Pan Am Timetable
If the U.S. government gives its public approval in
principle to the transaction, Pan Am would immediately move
to finalize its agreement with Iran. Initially, this would take
the form of a letter of intent outlining the general terms of the
transaction and would be followed by detailed negotiations of
the final loan documents. As soon as the letter of intent was
signed, Pan Am would also begin negotiations with its
existing bank and insurance company creditors. It is anticipated
that the results of the negotiations with its U.S. creditors
CONFIDENTIAL
CONFIDENTIAL
-3-
would have a substantial impact on the final form of the
detailed agreement with Iran. As soon as these negotiations
were completed, Pan Am would make a final filing with the CAB
for approval of the transaction.
Basic Issues
The transaction raises a number of basic questions which must
be considered before Administration approval can be given. These
include:
1. Why does Iran want to make such an investment?
2. Do we want a foreign government to have a substantial
interest in the major U.S. international air carrier --
even though it is highly regulated by the CAB?
3. What effect will the Iranian investment have on (a) the
ability of the Defense Department to utilize Pan Am
equipment in its Civil Reserve Air Fleet and (b)
continuation of the classified contracts Pan Am has
with DOD?
4. What are the consequences of a denial on future OPEC
government investment in the U.S.? If we refuse to
approve the present investment in a heavily regulated
industry, what kind (if any) OPEC government investment
will we accept?
5. What effect will the denial have on our relations with
Iran?
CONFIDENTIAL
-4-
6. (a) Would refusal to approve the proposed transaction
substantially increase the likelihood of Pan Am bank-
ruptcy and mean that the government will have to face
again the difficult problem of if and how it should
assist Pan Am?
(b) Conversely, is this assistance likely to provide
a long term solution to Pan Am's financial problems.
(c) If Pan Am continues to experience financial
difficulties after the Iranian loan, would the USG
be under pressure to bail out Pan Am for foreign
policy reasons?
7. What effect would substantial Iranian influence
in Pan Am have on CAB route awards and our inter-
national aviation policy generally?
Discussion of Basic Issues
1. Why Would Iran Make Such An Investment?
In considering why Iran would be interested in making a sub-
stantial investment in an ailing U.S. corporation, one must
remember that Pan Am has had a long and generally cordial
relationship with Iran -- involving technical assistance
and participation in classified defense work carried
out in Iran. In addition, the Shah himself has a personal
interest in aviation matters. Pan Am representatives feel
that, while the arrangement could lead to increased technical
CONFIDENTIAL
-5-
assistance for Iran National Airlines, the main reasons for the
transactions are prestige and Iran's desire to become a major
factor in the world wide hotel industry and in international
aviation. Pan Am officials also believe that the Iranian
offer represents a genuine effort by the Shah to make a
constructive, cooperative move toward improvement of Iranian
U.S. relations and that the Iranians feel that the investment
could be financially attractive if Pan Am's profits improve
and its stock price rises.
2. Should a Foreign Government Have a Major Interest in
Pan Am?
The answer to this question depends largely on the precise
nature and extent of the foreign government's interest. This section
summarizes the Iranian interest in Pan Am and concludes that there
is little possibility that Iran could exercise effective
control over the operations and management of Pan Am.
Iranian Position as a Creditor. Iran is seeking no pre-
ferred position and wants only to be treated equally with U.S.
creditors. Accordingly, it has insisted that the loan be secured
pari passu with U.S. creditors (i.e. Iran will have a pari passu
security interest in aircraft and other equipment). However,
Iran is willing to relinquish its security if U.S. creditors
are willing to do the same. Iran has no interest in being the
sole or even dominant creditor and has made continuation of the
U.S. bank credit agreement a condition precedent to the investment.
One of the key parts of the proposed transaction is the
CONFIDENTIAL
-6-
use of a substantial portion of the Iran loan to purchase at a
substantial (i.e. 50%) discount senior debt now held by U.S.
institutional lenders. Pan Am would hope to acquire at least 75%
of such debt and, if successful, Pan Am's debt structure would
be as follows:
Publicly held debt -- $480 million
U.S. Banks -- $125 million
Institutional Senior Debt -- $100 million
Iranian Loan -- $245 million
Depending on how much of the senior debt is purchased, Iran
would hold between 20 and 30% of Pan Am total debt.
The precise terms of the Iranian debt have not been
agreed and would depend on the outcome of difficult negotiations
with current U.S. holders of bank credit and senior debt.
Detailed negotiations with Iran would begin after the signing
of a letter of intent.
Iranian Equity Position. If Iran exercised its option to
purchase 6 million shares of Pan Am stock it would hold 13%
of the then outstanding common stock. This, together with
approximately 5% now held by other foreign investors, would
involve a foreign ownership of Pan Am of approximately 18%.
These interests would, however, be substantially diluted if the
Iranian investment leads to a merger -- as Pan Am officials
hope. The issuance of warrants to Iran would be subject to
CAB approval, which would also be required for any further
equity acquisition by Iran. Once it acquired 5% of the out-
standing shares Iran would be required to file reports with the
CONFIDENTIAL
-7-
SEC stating inter alia whether the purpose of the acquision
is to acquire control.
Iran may sell its warrants if it does not want to acquire
a permanent equity position in Pan Am. This provision of the
transaction was negotiated to enable Iran to benefit financially
through a rise in the price of the Pan Am common stock in a way
that does not require it to become a shareholder. To protect
against the possibility that Iran would transfer the entire
6 million shares to one person (e.g. another OPEC government)
the agreement specifically prohibits a transferee from acquiring
more than 1% of the outstanding shares without company approval.
Iran Membership on Board of Directors. While Iran would
have one member on the board, there. is no possibility that this
number could be increased without company and CAB approval.
The Pan Am board nominates all new directors and any Iranian
director would be subject to CAB approval. As further protection,
Pan Am common shares carry no cummulative voting rights, a fact
which severely limits the ability of Iran to control the Board.
Relationship Between Pan Am and Iran if Transaction is
Consumated. Recent news reports have extrapolated from Pan Am's
past relationship with Iran to conclude that the proposed agreement
would involve a full working relationship in which Pan Am would
(1) make Iran National Airlines into a major international
airlines, (2) provide technical assistance to Iran Air to fly
-8-
CONFIDENTIAL
the Concorde; (3) lease Concordes from Iran for its own use
and (4) furnish technical assistance for the F 14 military
fighter fleet Iran is purchasing from Grumman.
Pan Am has indicated that this is not part of the current
transaction and that there are no understandings with Iran
on Iran Air with regard to any of these matters. In this
regard, it should be pointed out that Iran has the financial
resources to secure any needed technical assistance from other
countries (especially France and the U.K.). Furthermore, any
technical assistance agreement or any fares re Concorde planes
would need to be approved by the CAB before work could be
undertaken.
Role of CAB. The entire transaction is subject to CAB
approval which Pan Am would seek as soon as definitive
negotiations with the Iranians had been concluded. The Board
must approve (1) any acquisition of control of Pan Am and (2)
interlocking directorships. In addition, any technical
assistance agreement with Iranian National Airways would
also be subject to Board approval as would any fare agreement
for the Concorde. Although Iran has indicated during
negotiations that it does not want control, ownership of 10%
or more of the voting securities of an airline gives rise to a
presumption of control under the Federal Aviation Act. Iran's
-9-
CONFIDENTIAL
ownership of warrants to purchase 13% of the currently out-
standing common stock, combined with the substantial creditor
interest, would probably constitute legal "control" requiring
CAB approval.
Iran has been fully informed of the need for CAB approval.
Although they have been warned that the President has no control
over the ultimate CAB decision, they do not appear to fully
understand that Administration approval in principle does not
necessarily mean that the CAB would approve the transaction.
Should the CAB ultimately disapprove the transaction, after
public Administration approval, Pan Am representatives believe
this could cause misunderstandings.
With respect to CAB regulation generally, it is hard to
imagine an area where the government and an independent
regulatory agency exercise more control. Major operating
decisions and any sale of a substantial part of airline assets
would be subject to CAB review. International route awards
are subject to CAB and Presidential review. In addition,
there are specific pre-existing restrictions limiting (a)
aggregate foreign equity holdings to 25% and (b) foreign
participating in management.
Conclusion. If Iran does not exercise its warrants, it
would have no equity interest or control of Pan Am. If it
does exercise its option to its fullest extent, Iran would
probably be a "controlling shareholder" for SEC purposes
CONFIDENTIAL
-10-
and might be deemed to have acquired "control" for CAB purposes.
In spite of these legal concepts of control, there is no way
Iran could exercise effective or working control over the
management and operation of Pan Am.
3. Effect of Iranian Influence on CRAF and Classified Contracts
While concern has been expressed over the possible loss of
Pan Am's contribution to the CRAF fleet because of an Iranian
security interest in Pan Am's planes, any Pan Am bankruptcy
would deny an effective Pan Am contribution to the CRAF program.
DOD has indicated that the most important way to ensure
adequate participation of Pan Am in CRAF is to keep Pan Am
operational and the planes and crews flying -- i.e. keep Pan
Am out of bankruptcy. Furthermore, disposition of assets
and bankruptcy is controlled by the trustee and not the creditors
which means that Iran would not have ultimate control over the
disposition of Pan Am's aircraft. In addition, Pan Am officials
have given assurances that they will honor all existing CRAF
contracts and that this investment will have no impact on
negotiations with DOD to expand CRAF.
According to DOD, Pan Am has some defense contracts involving
highly classified material. Therefore, the Iranian investment
might involve a breach of DOD's Industrial Security Regulations
unless (1) Iran is willing to drop its request for a member of
the Board and/or place its warrants and security interest in
a U.S. trust with U.S. trustees or (2) Pan Am can spin-off its
classified work into a separate subsidiary insulated from any
Iranian interest.
CONFIDENTIAL
-11-
4. Consequences of Denial on Future OPEC Investment in
the U.S.
OPEC investment policies in the United States will be
affected by the success or failure of the proposed arrangement.
If the deal is successfully concluded without USG opposition,
OPEC countries with significant cash reserves in short-term
and highly liquid positions will be encouraged to proceed with
longer term investments. However, the conversion of investment
portfolios into equity positions will continue to be dictated by
economic factors, including ințerest rates and company profit-
ability. We would use this investment -- constructive objective,
minimal control, and a highly regulated industry --- as a prototype
or precedent to help guide additional OPEC investment in a positive
fashion.
A negative decision on the Pan Am case by the USG would be
weighed carefully by OPEC finance managers as an indicator of
hostile USG attitudes toward other long-term OPEC investments.
If it could be made clear that such a decision were based on
the merits of the Pan Am issue per se and not on the principle
of restricting OPEC investments, the current thrust of OPEC
financial policies will not be greatly affected. If, on the
other hand, OPEC investors saw U.S. disapproval as signaling
a broader U.S. intent to place limitations on OPEC equity holdings
in the U.S., the effect of such a negative signal could be profound.
It would immediately affect OPEC plans to move into long-term
-12-
CONFIDENTIAL
holdings. The sensitivity of OPEC financial managers to the issue
will have been increased by current efforts of members of Congress
to introduce highly restrictive legislation aimed specifically
at limiting the size of OPEC investment in the U.S.
Within the context of OPEC investor reaction, therefore, the
proposed Iranian/Pan Am arrangement focuses directly on basic
issues of the U.S. position on oil-money recycling:
-Does the U.S. wish longer-term inward investment by oil-
producers?
-If not, can the U.S. structure OPEC investments toward short-
term instruments without so undermining OPEC-investor confidence
that incentives to invest in even short-term positions are not lost?
Analysis suggests that the U.S. should encourage the re-
adjustment of OPEC state portfolios toward constructive, long-
term, non-volatile and perhaps controlled investments. At the
moment an interagency review of foreign investment in the United
States is underway. While a consensus has not yet been reached,
it is nevertheless possible to say that all but the most extreme
policy approaches under consideration would permit some foreign
government investment in U.S. firms, including such firms as
Pan Am.
5. Effect of Denial on Iranian Investment Policies and
U.S./Iranian Relations with Iran.
If the proposed Iran/Pan Am deal were disapproved by the
USG for reasons which Iran felt were discriminatory or unjustified,
there would probably be a major impact on Iranian investment
plans in the United States. Iranian assets in the U.S., about
-13-
CONFIDENTIAL
25% of Iran's total overseas investments, would seek European
or other non-U.S. opportunities for investment giving both
reasonable return and assurance of approval. This trend would
accelerate as the profitability of Iran's short term income-
bearing dollar instruments declined along with interest rates
through 1975.
If it were clear to the Iranian Government that a decision
to disapprove the Pan Am deal was made for reasons which did not
affect the principle of OPEC -- and Iranian -- equity investment
in the U.S., there would be a negative impact nevertheless, but
shorter-lived. Iranian investment planning would be restructured
toward projects or areas of profitability more likely to win
USG approval. Iranian investments now in the U.S. would
probably not seek non-U.S. outlets.
Similarly, U.S./Iran political relations would be affected
according to the degree of discrimination which the Iranians
believed to be the cause of a USG decision to disapprove the
Pan Am transaction. If disapproval (a) were shown to be an
act confined to the Pan Am case itself and (b) was meant as no
impediment to the broadening U.S./Iranian relationship
or to U.S. willingness to cooperate with and assist Iran in
other areas (and this would have to be made clear to the
Shah at the highest level of the USG if a negative determination
is made), the political impact would be relatively short-lived.
CONFIDENTIAL
-14-
6. Effect of the Investment on Pan American Financial Situation
Pan Am's 1974 pre-tax loss was $135 million and estimates
indicate a minimum $65 million loss during 1975. Relatively
small drops in estimated traffic or revenue passenger miles
could create a cash crisis which would lead to bankruptcy. Given
the present economic situation, prospects are for level traffic
volume in 1975 compared to 1974. In the judgment of Pan Am and its
investment bankers, the government's Seven Point Action Plan,
a merger, route spin-offs or alternative sources of finance
could not provide the relief necessary in time to avert the real
possibility of bankruptcy in late 1975. The Iranian investment
is, in their judgment, the only currently available way to
eliminate this possibility and give the company an opportunity
to return to long run economic viability. Pan Am further indicates
that this financing will provide a medium term solution to their
financing problems by (1) offering immediate short term cash
resources, (2) providing relief over the next two years from
debt principal repayments; and (3) freeing of assets that could
act as collateral for future loans. The only long term solution
to Pan Am's situation is a return to profitability. There is no
assurance that, absent an immediate threat to Pan Am' survival,
management would be motivated to take the drastic actions --
involving route restructuring or merger -- necessary to return to
long run profitability. Thus, in the view of DOT, the company's
long run viability remains in doubt.
- 15 -
Effect of Iran's Interest in Pan Am on
International Aviation Policy Generally
The status of Iran as a major creditor and possibly
also significant shareholder of Pan Am could have a profound
effect on U.S. intérnational aviation decisions. The extent
of the effect will depend on the sensitivity of our relation-
ship to the Government of Iran.
Presidential decisions are most subject to potential
influence: route awards (adding to Pan Am's routes; taking
routes away from Pan Am; adding or taking away from Pan Am's
competitors- the President has ultimate authority); Presidential
review of CAB rate decisions (suspending or rejecting a rate
not covered by carrier agreement--charter rates, non-IATA
scheduled rates) are subject to Presidential veto; Administration
decisions on whether to endorse or oppose subsidies for Pan
Am; merger approval; etc. Depending upon how sensitive our
relationships with Iran are at any given moment of Executive
Branch decision, it could have a heavy impact on the decision
made.
Many Civil Aeronautics Board decisions are not subject to
Presidential review. But the foreign policy implications of CAB
decisions are clearly considered by the Board. Thus, no major
CAB decision for or against Pan Am could be said to be free
from the influence of our foreign policy relationship with Iran.
- 16 -
Initial Congressional and Labor Reaction
Pan Am has consulted with several Senators and received
no adverse reaction. They report that Senators Church and
Williams were enthusiastic; that Senator Percy was "very
affirmative"; that Senator Stevenson felt it was a good
solution to a difficult problem which avoided government
assistance as in Lockheed and Penn Central; that Senator Scott
saw no adverse influence or nothing on foreign policy grounds
that caused concern; that Senators Javits, Stevens and Pearson
were not adverse but felt it was too bad that a U.S. company
had to be supported by a foreign government; and that Senators
Jackson and Magnuson both indicated they would remain "neutral".
Meetings have been more difficult to arrange on the House
side but Pan Am plans to visit Representative Morgan and members
of the House Public Works Committee, which now has jurisdiction
over most matters affecting Pan Am.
Pan Am reports that initial contacts with the Teamsters
and AFL-CIO indicate that labor will not have major objections
to the transaction.
CONFIDENTIAL
January 31, 1975
PRINCIPAL PROVISIONS OF TENTATIVE
AGREEMENT BETWEEN PAN AM AND IRAN
The agreement contemplates that the Iranian side will make available to Pan Am
an amount not to exceed $300 million. The principal provisions of the tentative
agreement are as follows:
1) Of the $300 million, an amount (say $55 million) will be used to acquire 55%
of the stock of Intercontinental Hotels Corporation, an off-shore hotel chain
wholly owned by Pan Am. The exact purchase price is yet to be negotiated.
Each side will have a right of refusal in the event either wishes to sell all
or any part of its IHC stock.
2) Out of the remainder of the $300 million, the Company will endeavor to acquire
at least 75% of the outstanding $389,500,000 of Pan Am's senior debt now held
by Institutional Investors at 2 substantial discount price satisfactory to Iran
and Pan Am. Up to $70 million of the amount remaining from the $300 million
after the acquisition of the Hotel Company stock and the discount purchase of
senior debt will be lent to the Company for its necessary cash needs.
3) The monies made available for the acquisition of senior debt and the Company's
cash needs will be in the form of a ten-year loan to Pan Am bearing interest
at a rate of 10½ per annum, with a. commitment fee of 7/2% per annum. Since no
principal repayments will be required for the first three years, this will im-
prove the Company's cash flow for the first three years by a cumulative amount
of roughly $60 million.
4) The agreement is subject to the condition that the banks which have presently
extended a line of credit amounting to $125 million, payable on September 30,
1975, will continue that line of credit into the future.
The funds lent by Iran shall share pari passu in collateral with the other
senior debt of the Company, but if the other lenders agree to extend their credit
on an unsecured basis, Iran will accept that its loan not be secured.
5) As part of the total transaction, Pan Am will make available to Iran warrants
entitling it to purchase six million shares of the Company's stock at any time
within ten years after the date of the agreement, at the lesser of $2.75 per
share or 15% premium of the average daily closing prices from the signing of
the agreement to one week prior to the first borrowing. The warrants would be
transferrable either through a public offering or in private transactions pro-
vided that, unless the Company otherwise agrees, no transferee can acquire
warrants to purchase a number of shares greater than 1% of the number of shares
of the Company stock then outstanding.
When fully exercised, those warrants would result in Iran acquiring 13%
of the issued shares (computed after the full exercise of the warrants), or
8% of the total authorized shares (41 million shares are now issued and out-
standing; 80 million are authorized).
6) Pan Am's management will include on the management slate of directors (now con-
sisting of 17 directors, but expandable to 20) one person nominated by Iran SO
long as Iran continues to hold the debt or the shares acquired through the exer-
cise of the warrants.
7) It is understood that final implementation of the agreement will be subject to
requisite approvals by the pertinent U. S. regulatory agencies.
ANNEX 2
(Suggestion for Form of Administration
Statement Provided by Pan American)
DRAFT MESSAGE FROM SECRETARY OF STATE
Please deliver the following personal message from the
Secretary to the Foreign Minister soonest:
Dear Mr. Minister:
Representatives of Pan American Airways have informed the United
States Government of their discussions with regard to a possible
investment by the Government of Iran in Pan American Airways.
Although I understand that these discussions have not yet
been definitively concluded, I would like you to know that
this matter is receiving my personal attention and that of my
senior colleagues. In principle, my government would regard
such an investment favorably as a further contribution to the
close spirit of cooperation that exists between Iran and the
United States.
As you perhaps know, investments in American air transport
companies are subject to special laws and regulations and
possible review by one or more administrative agencies.
Although, in advance of such a review, it is not possible to
predict precisely how such laws or regulations might be applied
to any particular investment, I would hope that these problems
can be resolved in a manner satisfactory to your government.
COUNCIL ON INTERNATIONAL ECONOMIC POLICY
file
WASHINGTON, D.C. 20500
February 4, 1975
CONFIDENTIAL
MEMORANDUM FOR
THE EXECUTIVE COMMITTEE
ECONOMIC POLICY BOARD
Re:
Proposed Iranian Government
Investment in Pan American Airlines
Attached, for consideration on Wednesday, February 5,
1974 is an options paper concerning Pan Am's request for
Administration approval of a $300 million Iranian invest-
ment in Pan Am.
Part 1 provides a brief summary of the transaction,
outlines the key issues and summarizes the reasons for and
against Administration approval; Part 2 provides details of
the transaction and discusses some of the major questions
raised; Part 3 contains options concerning (a) Administra-
tion approval and disapproval and (b) the form of any Adminis-
tration statement in connection with the transaction; and
Part 4 sets forth agency recommendations.
JM John M. Dunn
Acting
Executive Director
DECLASSIFIED
E.O. 12958, Sec. 3.5
NSC Memo, 11/24/98, State Dept. Guidelines
By WHM , NARA, Date 11/20/00
CONFIDENTIAL
PROPOSED IRANIAN GOVERNMENT
INVESTMENT IN
PAN AMERICAN AIRLINES
Contents
1. Summary
2. Outline of Terms and Discussion of Basic Issues
a. Proposed Investment
b. Pan Am Timetable
C. Basic Issues
d. Discussion of Basic Issues
e. Initial Congressional Reaction
3. Options
a. Options re Basic Policy Issue
b. Options re Request for Public USG Statement of
Approval
4. Agency Recommendations
Annex 1: Summary of the Principal Provisions of the Proposed
Investment
Annex 2: Pan Am's suggestion for the form of the Administra-
tion statement to the Iranian Government.
DECLASSIFIED
E.O. 12958, Sec. 3.5
NSC Memo, 11/24/98, State Dept. Guidelines
By WHEN NARA, Date 11/20/00
CONFIDENTIAL
SUMMARY
Pan Am Request - At the request of the Iranian government,
Pan Am has asked the Administration to give prompt public approval
in principle to a proposed $300 million investment in Pan Am.
Key Aspects of Transaction - Upon completion of the transaction
as proposed, Iran would hold 20-30% of Pan Am's debt, have
warrants to purchase up to 13% of the equity and have on man
on Pan Am's 17 member Board. The transaction would be subject
to CAB approval.
Key Questions for Consideration -
1. Why does Iran want to make such an investment?
2. Do we want a foreign government to have a substantial
interest in the major U.S. international air carrier -- even
though it is highly regulated by the CAB?
3. What effect (if any) will the proposed Iranian Invest-
ment have on the (a) ability of DOD to utilize Pan Am equipment
in its Civil Reserve Air Fleet and (b) continuation of classified
contracts Pan Am has with DOD?
4. What are the consequences of a denial on future OPEC
government investment in the U.S.?
5. What effect would denial have on relations with Iran?
6. Would. refusal to approve the investment substantially
increase the likelihood of Pan Am bankruptcy and mean that the
government will have to face again the issue of when and if it
should assist Pan Am?
7. Conversely, is Iranian assistance likely to produce a
long run solution to Pan Am's financial problems?
Basic Options -
1. Delay decision until current Administration review of
OPEC investmnet in the U.S. is complete.
2. Acquiesce in investment as proposed.
3. Acquiesce in investment only on specified conditions.
4. Refuse to endorse investment.
CONFIDENTIAL
-2-
Reasons for USG Approval -
1. Our oil money recycling policy contemplates certain types
of OPEC government investment in the U.S. and the present pro-
posal would represent one of the more favorable forms of such
investment because:
a. Iran does not seek, and would not have, effective
control over the management and operation of the company;
b. Pan Am is in a highly regulated industry where most
major decisions affecting the firm are subject to CAB
approval;
C. Existing law protects against excessive foreign
ownership by limiting it to 25% of equity. (Con-
versely, our law would seem to expressly permit
foreign ownership up to the 25% limit);
d. OPEC government excess reserves are being used in
a constructive way by providing funds to an ailing
U.S. firm that has been unable to obtain capital
elsewhere;
e. Would free up funds of present institutional lenders
for investment elsewhere at a time when capital is
badly needed.
2. The investment sets a useful precedent for the type
of OPEC investment we would welcome (i.e. mainly debt with
relatively small equity interest in a highly regulated industry).
3. Failure to approve may irritate relations with Iran.
4. Failure to approve may lead to Pan Am bankruptcy which,
as decided by the Administration last Fall, would be undesirable.
5. Even if the result of the current policy review is to
place new restrictions on foreign government investment, the
proposed deal would be within (or close to) the guidelines now
being considered for permitted investment.
6. Public approval now would serve as a useful trial balloon
to test Congressional and public reaction.
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Reasons Against USG Approval
1. Any decision on the Iranian investment should be
postponed until after the current interagency policy review
is considered by the Economic Policy Board.
2. Prevents Iranian influence in Pan Am which might be
used in a subtle way against our national interest.
3. Approval now might prejudice development of joint
consumer nation investment policy contemplated by Secretary of
State.
4. Iranian investment in Pan Am might give Iran access to
highly classified information unless special protections are
devised.
5. Iranian investment might prejudice availability of
Pan Am plans for CRAF fleet.
6. Further Pan Am financial problems could lead to another
Iranian bailout and increasing Iranian influence over Pan Am
(up to the 25% statutory limit on foreign ownership).
7. A bailout of Pan Am could prevent needed restructuring
of the company (e.g. merger or spin-off of unprofitable routes).
8. Although it could not effectively control Pan Am, Iran
might have "legal control" for SEC and CAB purposes -- i.e. it
would be a controlling shareholder for SEC purposes and might
be deemed to have acquired "control" for CAB purposes.
Form of Statement if Investment is Approved
1. U.S. unilateral public statement as proposed by Pan Am.
2. USG public statement as above accompanied by Iranian
public statement indicating (a) awareness of necessity
of CAB approval and (b) no desire to control Pan Am.
3. Joint U.S./Iran Statement (preferably within Joint
Commission context) embodying 1 and 2.
4. No public statement but USG informs Iranian government
of approval.
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OUTLINE OF TERMS AND
DISCUSSION OF BASIC ISSUES
At the request of the Iranian Government, Pan American has
asked the Administration to give public approval in principle
to a proposed $300 million Iranian investment in Pan Am.
Administration approval would in no way bind the CAB which would
also have to approve the transaction
Proposed Iranian Investment
The details of the proposed transaction are outlined in
the attached annex prepared by the Company and its investment
bankers. The principal terms can be summarized as follows:
1. Iran will make available $300 million to Pan Am;
2. $55 million of this amount will be used to acquire
55% of Intercontinental Hotels, an off shore hotel
chain now owned by Pan Am.
3. The remaining $245 million will be provided in the
form of a 10 year loan with a 10 1/2% interest rate
and a three-year grace period with respect to principal
repayments. There are provisions for accelerated
repayment at Pan Am's option.
4. The loan is conditional upon U.S. banks continuing
the current $125 million credit agreement and will be
secured pari passu with other senior debt. (Iran is,
however, willing to relinquish any collateral if U.S.
creditors agree to do likewise.)
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5. About $190 million of the $245 million loan will be
used to acquire at discount at least 75% of $390 million
debt now held by institutional investors and $55 million
of the loan will be used to satisfy current cash needs
of the company.
6. Iran will also obtain warrants to purchase 6 million
shares of Pan Am which, if exercised, could give Iran
13% of the then outstanding equity. The warrants
would be transferable but no transferee could acquire
warrants to purchase more than 1% of the outstanding
shares without Pan Am approval.
7. Subject to CAB approval, Iran would nominate one
member of the Pan Am 17 member board.
8. The transaction would be subject to approval by relevant
U.S. regulatory agencies -- particularly the CAB.
Pan Am Timetable
If the U.S. government gives its public approval in
principle to the transaction, Pan Am would immediately move
to finalize its agreement with Iran. Initially, this would take
the form of a letter of intent outlining the general terms of the
transaction and would be followed by detailed negotiations of
the final loan documents. As soon as the letter of intent was
signed, Pan Am would also begin negotiations with its
existing bank and insurance company creditors. It is anticipated
that the results of the negotiations with its U.S. creditors
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would have a substantial impact on the final form of the
detailed agreement with Iran. As soon as these negotiations
were completed, Pan Am would make a final filing with the CAB
for approval of the transaction.
Basic Issues
The transaction raises a number of basic questions which must
be considered before Administration approval can be given. These
include:
1. Why does Iran want to make such an investment?
2. Do we want a foreign government to have a substantial
interest in the major U.S. international air carrier --
even though it is highly regulated by the CAB?
3. What effect will the Iranian investment have on (a) the
ability of the Defense Department to utilize Pan Am
equipment in its Civil Reserve Air Fleet and (b)
continuation of the classified contracts Pan Am has
with DOD?
4. What are the consequences of a denial on future OPEC
government investment in the U.S.? If we refuse to
approve the present investment in a heavily regulated
industry, what kind (if any) OPEC government investment
will we accept?
5.
What effect will the denial have on our relations with
Iran?
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6. (a) Would refusal to approve the proposed transaction
substantially increase the likelihood of Pan Am bank-
ruptcy and mean that the government will have to face
again the difficult problem of if and how it should
assist Pan Am?
(b) Conversely, is this assistance likely to provide
a long term solution to Pan Am's financial problems.
(c) If Pan Am continues to experience financial
difficulties after the Iranian loan, would the USG
be under pressure to bail out Pan Am for foreign
policy reasons?
7. What effect would substantial Iranian influence
in Pan Am have on CAB route awards and our inter-
national aviation policy generally?
Discussion of Basic Issues
1. Why Would Iran Make Such An Investment?
In considering why Iran would be interested in making a sub-
stantial investment in an ailing U.S. corporation, one must
remember that Pan Am has had a long and generally cordial
relationship with Iran -- involving technical assistance
and participation in classified defense work carried
out in Iran. In addition, the Shah himself has a personal
interest in aviation matters. Pan Am representatives feel
that, while the arrangement could lead to increased technical
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assistance for Iran National Airlines, the main reasons for the
transactions are prestige and Iran's desire to become a major
factor in the world wide hotel industry and in international
aviation. Pan Am officials also believe that the Iranian
offer represents a genuine effort by the Shah to make a
constructive, cooperative move toward improvement of Iranian
U.S. relations and that the Iranians feel that the investment
could be financially attractive if Pan Am's profits improve
and its stock price rises.
2. Should a Foreign Government Have a Major Interest in
Pan Am?
The answer to this question depends largely on the precise
nature and extent of the foreign government's interest. This section
summarizes the Iranian interest in Pan Am and concludes that there
is little possibility that Iran could exercise effective
control over the operations and management of Pan Am.
Iranian Position as a Creditor. Iran is seeking no pre-
ferred position and wants only to be treated equally with U.S.
creditors. Accordingly, it has insisted that the loan be secured
pari passu with U.S. creditors (i.e. Iran will have a pari passu
security interest in aircraft and other equipment). However,
Iran is willing to relinquish its security if U.S. creditors
are willing to do the same. Iran has no interest in being the
sole or even dominant creditor and has made continuation of the
U.S. bank credit agreement a condition precedent to the investment.
One of the key parts of the proposed transaction is the
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use of a substantial portion of the Iran loan to purchase at a
substantial (i.e. 50%) discount senior debt now held by U.S.
institutional lenders. Pan Am would hope to acquire at least 75%
of such debt and, if successful, Pan Am's debt structure would
be as follows:
Publicly held debt -- $480 million
U.S. Banks -- $125 million
Institutional Senior Debt -- $100 million
Iranian Loan -- $245 million
Depending on how much of the senior debt is purchased, Iran
would hold between 20 and 30% of Pan Am total debt.
The precise terms of the Iranian debt have not been
agreed and would depend on the outcome of difficult negotiations
with current U.S. holders of bank credit and senior debt.
Detailed negotiations with Iran would begin after the signing
of a letter of intent.
Iranian Equity Position. If Iran exercised its option to
purchase 6 million shares of Pan Am stock it would hold 13%
of the then outstanding common stock. This, together with
approximately 5% now held by other foreign investors, would
involve a foreign ownership of Pan Am of approximately 18%.
These interests would, however, be substantially diluted if the
Iranian investment leads to a merger -- as Pan Am officials
hope. The issuance of warrants to Iran would be subject to
CAB approval, which would also be required for any further
equity acquisition by Iran. Once it acquired 5% of the out-
standing shares Iran would be required to file reports with the
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SEC stating inter alia whether the purpose of the acquision
is to acquire control.
Iran may sell its warrants if it does not want to acquire
a permanent equity position in Pan Am. This provision of the
transaction was negotiated to enable Iran to benefit financially
through a rise in the price of the Pan Am common stock in a way
that does not require it to become a shareholder. To protect
against the possibility that Iran would transfer the entire
6 million shares to one person (e.g. another OPEC government)
the agreement specifically prohibits a transferee from acquiring
more than 1% of the outstanding shares without company approval.
Iran Membership on Board of Directors. While Iran would
have one member on the board, there is no possibility that this
number could be increased without company and CAB approval.
The Pan Am board nominates all new directors and any Iranian
director would be subject to CAB approval. As further protection,
Pan Am common shares carry no cummulative voting rights, a fact
which severely limits the ability of Iran to control the Board.
Relationship Between Pan Am and Iran if Transaction is
Consumated. Recent news reports have extrapolated from Pan Am's
past relationship with Iran to conclude that the proposed agreement
would involve a full working relationship in which Pan Am would
(1) make Iran National Airlines into a major international
airlines, (2) provide technical assistance to Iran Air to fly
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the Concorde; (3) lease Concordes from Iran for its own use
and (4) furnish technical assistance for the F 14 military
fighter fleet Iran is purchasing from Grumman.
Pan Am has indicated that this is not part of the current
transaction and that there are no understandings with Iran
on Iran Air with regard to any of these matters. In this
regard, it should be pointed out that Iran has the financial
resources to secure any needed technical assistance from other
countries (especially France and the U.K.). Furthermore, any
technical assistance agreement or any fares re Concorde planes
would need to be approved by the CAB before work could be
undertaken.
Role of CAB. The entire transaction is subject to CAB
approval which Pan Am would seek as soon as definitive
negotiations with the Iranians had been concluded. The Board
must approve (1) any acquisition of control of Pan Am and (2)
interlocking directorships. In addition, any technical
assistance agreement with Iranian National Airways would
also be subject to Board approval as would any fare agreement
for the Concorde. Although Iran has indicated during
negotiations that it does not want control, ownership of 10%
or more of the voting securities of an airline gives rise to a
presumption of control under the Federal Aviation Act. Iran's
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ownership of warrants to purchase 13% of the currently out-
standing common stock, combined with the substantial creditor
interest, would probably constitute legal "control" requiring
CAB approval.
Iran has been fully informed of the need for CAB approval.
Although they have been warned that the President has no control
over the ultimate CAB decision, they do not appear to fully
understand that Administration approval in principle does not
necessarily mean that the CAB would approve the transaction.
Should the CAB ultimately disapprove the transaction, after
public Administration approval, Pan Am representatives believe
this could cause misunderstandings.
With respect to CAB regulation generally, it is hard to
imagine an area where the government and an independent
regulatory agency exercise more control. Major operating
decisions and any sale of a substantial part of airline assets
would be subject to CAB review. International route awards
are subject to CAB and Presidential review. In addition,
there are specific pre-existing restrictions limiting (a)
aggregate foreign equity holdings to 25% and (b) foreign
participating in management.
Conclusion. If Iran does not exercise its warrants, it
would have no equity interest or control of Pan Am. If it
does exercise its option to its fullest extent, Iran would
probably be a "controlling shareholder" for SEC purposes
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and might be deemed to have acquired "control" for CAB purposes.
In spite of these legal concepts of control, there is no way
Iran could exercise effective or working control over the
management and operation of Pan Am.
3. Effect of Iranian Influence on CRAF and Classified Contracts
While concern has been expressed over the possible loss of
Pan Am's contribution to the CRAF fleet because of an Iranian
security interest in Pan Am's planes, any Pan Am bankruptcy
would deny an effective Pan Am contribution to the CRAF program.
DOD has indicated that the most important way to ensure
adequate participation of Pan Am in CRAF is to keep Pan Am
operational and the planes and crews flying -- i.e. keep Pan
Am out of bankruptcy. Furthermore, disposition of assets
and bankruptcy is controlled by the trustee and not the creditors
which means that Iran would not have ultimate control over the
disposition of Pan Am's aircraft. In addition, Pan Am officials
have given assurances that they will honor all existing CRAF
contracts and that this investment will have no impact on
negotiations with DOD to expand CRAF.
According to DOD, Pan Am has some defense contracts involving
highly classified material. Therefore, the Iranian investment
might involve a breach of DOD's Industrial Security Regulations
unless (1) Iran is willing to drop its request for a member of
the Board and/or place its warrants and security interest in
a U.S. trust with U.S. trustees or (2) Pan Am can spin-off its
classified work into a separate subsidiary insulated from any
Iranian interest.
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4.
Consequences of Denial on Future OPEC Investment in
the U.S.
OPEC investment policies in the United States will be
affected by the success or failure of the proposed arrangement.
If the deal is successfully concluded without USG opposition,
OPEC countries with significant cash reserves in short-term
and highly liquid positions will be encouraged to proceed with
longer term investments. However, the conversion of investment
portfolios into equity positions will continue to be dictated by
economic factors, including interest rates and company profit-
ability. We would use this investment -- constructive objective,
minimal control, and a highly regulated industry -- as a prototype
or precedent to help guide additional OPEC investment in a positive
fashion.
A negative decision on the Pan Am case by the USG would be
weighed carefully by OPEC finance managers as an indicator of
hostile USG attitudes toward other long-term OPEC investments.
If it could be made clear that such a decision were based on
the merits of the Pan Am issue per se and not on the principle
of restricting OPEC investments, the current thrust of OPEC
financial policies will not be greatly affected. If, on the
other hand, OPEC investors saw U.S. disapproval as signaling
a broader U.S. intent to place limitations on OPEC equity holdings
in the U.S., the effect of such a negative signal could be profound.
It would immediately affect OPEC plans to move into long-term
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holdings. The sensitivity of OPEC financial managers to the issue
will have been increased by current efforts of members of Congress
to introduce highly restrictive legislation aimed specifically
at limiting the size of OPEC investment in the U.S.
Within the context of OPEC investor reaction, therefore, the
proposed Iranian/Pan Am arrangement focuses directly on basic
issues of the U.S. position on oil-money recycling:
-Does the U.S. wish longer-term inward investment by oil-
producers?
-If not, can the U.S. structure OPEC investments toward short-
term instruments without so undermining OPEC-investor confidence
that incentives to invest in even short-term positions are not lost?
Analysis suggests that the U.S. should encourage the re-
adjustment of OPEC state portfolios toward constructive, long-
term, non-volatile and perhaps controlled investments. At the
moment an interagency review of foreign investment in the United
States is underway. While a consensus has not yet been reached,
it is nevertheless possible to say that all but the most extreme
policy approaches under consideration would permit some foreign
government investment in U.S. firms, including such firms as
Pan Am.
5. Effect of Denial on Iranian Investment Policies and
U.S./Iranian Relations with Iran.
If the proposed Iran/Pan Am deal were disapproved by the
USG for reasons which Iran felt were discriminatory or unjustified,
there would probably be a major impact on Iranian investment
plans in the United States. Iranian assets in the U.S., about
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CONF IDENTIAL
25% of Iran's total overseas investments, would seek European
or other non-U.S. opportunities for investment giving both
reasonable return and assurance of approval. This trend would
accelerate as the profitability of Iran's short term income-
bearing dollar instruments declined along with interest rates
through 1975.
If it were clear to the Iranian Government that a decision
to disapprove the Pan Am deal was made for reasons which did not
affect the principle of OPEC -- and Iranian -- equity investment
in the U.S., there would be a negative impact nevertheless, but
shorter-lived. Iranian investment planning would be restructured
toward projects or areas of profitability more likely to win
USG approval. Iranian investments now in the U.S. would
probably not seek non-U.S. outlets.
Similarly, U.S./Iran political relations would be affected
according to the degree of discrimination which the Iranians
believed to be the cause of a USG decision to disapprove the
Pan Am transaction. If disapproval (a) were shown to be an
act confined to the Pan Am case itself and (b) was meant as no
impediment to the broadening U.S./Iranian relationship
or to U.S. willingness to cooperate with and assist Iran in
other areas (and this would have to be made clear to the
Shah at the highest level of the USG if a negative determination
is made), the political impact would be relatively short-lived.
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6. Effect of the Investment on Pan American Financial Situation
Pan Am's 1974 pre-tax loss was $135 million and estimates
indicate a minimum $65 million loss during 1975. Relatively
small drops in estimated traffic or revenue passenger miles
could create a cash crisis which would lead to bankruptcy. Given
the present economic situation, prospects are for level traffic
volume in 1975 compared to 1974. In the judgment of Pan Am and its
investment bankers, the government's Seven Point Action Plan,
a merger, route spin-offs or alternative sources of finance
could not provide the relief necessary in time to avert the real
possibility of bankruptcy in late 1975. The Iranian investment
is, in their judgment, the only currently available way to
eliminate this possibility and give the company an opportunity
to return to long run economic viability. Pan Am further indicates
that this financing will provide a medium term solution to their
financing problems by (1) offering immediate short term cash
resources, (2) providing relief over the next two years from
debt principal repayments; and (3) freeing of assets that could
act as collateral for future loans. The only long term solution
to Pan Am's situation is a return to profitability. There is no
assurance that, absent an immediate threat to Pan Am' survival,
management would be motivated to take the drastic actions --
involving route restructuring or merger -- necessary to return to
long run profitability. Thus, in the view of DOT, the company's
long run viability remains in doubt.
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Initial Congressional Reaction
Pan Am has consulted with several Senators and received no
adverse reaction. They report that Senators Churck and Williams
were enthusiastic; that Senator Stevenson felt it was a good
solution to a difficult problem which avoided government
assistance as in Lockheed and Penn Central; and that Senators
Senators Javits, Stevens and Pearson were not adverse but
felt it was too bad that a U.S. company had to be supported by
a foreign government. *
Meetings have been more difficult to arrange on the
House side but Pan Am plans to visit Representative Morgan and
members of the House Public Works Committee, which now has
jurisdiction over most matters affecting Pan Am.
*Senators Jackson and Magnuson were also consulted and both
indicated they would remain "neutral".
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OPTIONS
A. Options re Basic Policy Issue
The basic policy decision raised by Pan Am's request is
whether the USG should permit an OPEC government to acquire
a substantial interest in a major U.S. firm.
This same issue is the subject of an interagency review
to be presented to the EPB and NSC for consideration within two
to three weeks. The first matter requiring consideration is,
therefore, whether any decision on Pan Am should be postponed
until after receiving the results of this review. Pan Am
has requested a prompt answer (i.e. this week) and believes
that any substantial USG delay in responding could kill the
transaction.
Option 1 - Delay any decision until broader policy review is
completed.
Pro - Avoids potential embarassment of approving
present investment and subsequently adopting
policy which would have prevented it.
- Ensures full benefit of the current interagency
review and means that the Pan Am case is con-
sidered in light of all broader policy issues
re OPEC investment.
- Interagency review to be completed soon so
delay not apt to be more than three weeks.
Con - Public is aware of terms of deal and a prompt
Administration position is required.
- Delay may mean Pan Am loses opportunity for
Iranian investment.
- Delay may become an irritant in US/Iranian
relations.
- Proposed transaction is within (or very close
to) the limits being considered in the current
policy review for OPEC government investment.
- Result of review may be adoption of more liberal
policy and temporary delay may have given
incorrect signal as to our policy.
Option 2 - Permit investment as proposed.
Pro - Sets useful precedent for future pattern of
OPEC government investment (i.e. mainly debt
with relatively small equity interest in highly
regulated industry).
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- Provides substantial assurance that the deal
will go forward with its benefits to Pan Am.
- Avoids any possibility of irritating relations
with Iran by delay.
- Recognizes that terms are reasonable for a
corporation in Pan Am's current financial
condition.
- Excellent test case or trial balloon and
Congressional and public reaction can be
taken into account in shaping final policy.
- Ensures availability of operational planes for
CRAF fleet if Iranian investment prevents Pan
Am bankruptcy.
Con - May set direction of our basic policy without
benefit of the fuller review being undertaken
as part of the overall study of OPEC investment
in US.
- Present investment may be the opening wedge to
greater Iranian influence if Pan Am runs into
financial difficulty in the future.
- May prejudice DOD ability to utilize Pan Am
CRAF fleet in event of emergency.
- Approval now might prejudice development of
coordinated consumer nation policy toward
OPEC investment.
- Any Iranian influence might mean foreign policy
considerations would enter into USG and/or
CAB treatment of Pan Am.
- May breach DOD Industrial Security Regulations.
Option 3 - Permit investment only on specified conditions.
Pro - Minimizes any risk inherent in foreign govern-
ment investment in Pan Am.
- Ensures that the terms of the investment are
within the range of options now being considered
as a part of the broader policy review.
Con - Imposition of conditions might kill Iranian
investment in Pan Am
- Conditions not needed as proposed terms
reasonable, Iranina influence in Pan Am would
not give it effective control over management
and operations and company is already closely
regulated by the CAB.
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NOTE: THESE SUBOPTIONS SHOULD BE CONSIDERED ONLY IF OPTION 3
IS ACCEPTED.
If it is decided to impose conditions, there are a number
that one could adopt. Some of the most promising include:
Suboption 3a - Prevent Iran from being secured pari passu
with US creditors
Pro - Reduces the already minimal risk that Pan Am
planes would not be available to CRAF
- Reduces Iran's influence as a creditor
(especially its rights in event of a bank-
ruptcy).
Con - Might upset deal or irritate Iran by forcing
it to take inferior position to US creditors
- Not necessary as Pan Am's influence as a
creditor is limited by existing creditor's
rights and bankruptcy laws.
Suboption 3b - Require reduction in amount of equity Iran
could acquire from 13% to 10% (for CAB
purposes) or 6% (for DOD purposes).
Pro - Reduces the already minimal risk of actual
control over management
- Avoids presumption of "control" in Federal
Aviation Act and presumption of "foreign
control" under DOD Industrial Security
Regulations
Con - Might upset deal or needlessly irritate Iran.
- Reduction from 13% to 6% would have no effect
on amount of actual or effective control (as
opposed to legal control).
- Any subsequent merger (which Pan Am hopes
would be made possible by the Iranian deal)
would substantially dilute Iran's 13% interest.
- Even reduction below 6% might not satisfy DOD
and prevent breach of Industrial Security
Regulations.
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Suboption 3c - - Require Pan Am to spin-off all classified
defense work into a separate subsidiary in
which Iran had no direct interest.
Pro - Avoid problems with DOD Industrial Security
Regulations.
- Would be more acceptable to Iran than other
alternatives to solve DOD problems with
Iranian control (e.g. require Iran to put
its warrants and security interest in a
U.S. trust controlled by U.S. trustees).
Con - May be difficult, if not impossible, to
segregate Pan Am classified contracts.
- Would not satisfy DOD concern re availability
of Pan Am planes to CRAF fleet.
Suboption 3d - Require Iran to drop its request for a Pan
Am Board member.
Pro - Eliminates any risk of Iranian access to
classified information via Board membership
and should help prevent breach of DOD
Industrial Security Regulations.
Con - - Would probably upset deal as Iran wants to
be treated equally with other major creditors.
Suboption 3e - Require transfer of warrants to be subject
to CAB or USG approval.
Pro - Avoids transfer to "undesirable" potential
shareholders (e.g. an unfriendly OPEc government).
Con - Might upset the deal
- Could put CAB or USG in embarassing position of
having to chose between potential transferees
- Neglects fact that transfer already subject
to Pan Am approval and that any one transferee
can acquire no more tha 1% of the outstanding
stock.
Suboption 3£ - Approve subject to condition that Pan Am and
Iran subsequently conform the terms to
any specific limits ultimately adopted as
a result of the current review.
Pro - Ensures consistency of policy while giving
Pan Am the prompt answer it has requested.
Con - Complicates negotiations with Iran and
Pan Am creditors
- Proposed terms are within (or very close to)
any limits that are likely to be adopted
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Option 4 - Refuse to approve investment.
Pro - Prevents any Iranian influence in Pan Am that
could be used contrary to our national interest.
- Eliminates the very minimal risk that the CRAF
fleet not available in time of national
emergency.
- Eliminates the possibility of "creeping Iranian
influence" over Pan Am if a further bailout is
needed in the future.
- Prevents Iran from getting major stake in
international hotel business.
- Prevents Iran from increasing its prestige and
world wide visability and would be a very
minor deberrant to Shah in his desire to
become the dominant military/economic power in
the Gulf.
- Allows time to develop coordinated consumer
nation policy re OPEC investment.
Con - May force Pan Am into bankruptcy by denying it
only present source of financial relief.
- Failure to permit non-controlling OPEC govern-
ment investment in a highly regulated industry
would be taken as an indication that we wanted
no long term OPEC government investment in our
economy and could seriously handicap our
objective of obtaining sound, long term invest-
ments from them.
- Would undoubtedly affect relations with Iran
by rejecting a favorable deal offered in good
faith.
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B. Options re Pan Am Request for USG Public Statement of Approval
Option 1 - Make unilateral USG statement along the lines suggested
by Pan Am -- i.e. approve in principle but note that
transaction subject to CAB approval. (See Annex 2)
Pro - Satisfies Iranian request and enables Pan Am to
proceed to finalize transaction.
- Puts Administration on record that deal subject
to CAB approval and clearly indicates that the Adminis-
tration has no control over the CAB process.
Con - Unilateral USG approval followed by CAB dis-
approval might upset Iran and damage US/Iranian relations.
- Any USG statement of approval be interpreted as
favored treatment for Pan Am.
Option 2 - Make USG statement as in Option 1 but also insist on a
public statement from Iran indicating (1) spirit of
cooperation; (2) no desire to control affairs of
Pan Am and (3) Iran recognizes that transaction subject
to CAB approval.
Pro - Same advantages as in Option 1
- In addition, puts Iran on recrod as publicly
recognizing CAB approval needed and indicating no desire
to control Pan Am.
- Iranian public statement of intent minimizes
public and Congressional fear and provides basis for
quelling their possible concern.
Con - Insistence on public statement of Iranian intentions
runs risk of insulting Shah by implying we do not trust
informal assurances.
- Any USG approval may be interpreted as favored
treatment for Pan Am.
Option 3 - Insist on a Joint US/Iranian Statement (preferably within
the Joint Commission context) stressing spirit of
cooperation, US appreciation of Iranian loan, need
for CAB approval and understanding that Iran does not
want or intend to control the affairs of Pan Am.
Pro - Same advantages as in Options 1 and 2
- Puts foreign government investment in US
corporations on a government to government basis
- Establishes clear precedent for prior consultation
and discussion for major OPEC government investment in
the US.
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- Makes the investment a joint effort and improves
cooperation between the US and Iran
- Joint Statement could be more acceptable to Iran
as it treats Iran as responsible partner and emphasizes
the spirit of cooperation.
Con - Same as in Option 2.
- May establish a harmful precedent for OPEC govern-
ments seeking informal approvals of investments.
- USG may not want to appear overly cooperative
with Iran in order to avoid implication that we favor
Iran over other OPEC countries.
- Joint Statement might prejudice development of
joint consumer nation policy toward OPEC government
investment.
Option 4 - - Refuse any public comment on the proposed investment.
Pro - Does not involve the Administration in the trans-
action and leaves matter entirely to CAB.
- Eliminates possibility of embarassment which
would result from CAB disapproval after CAB approval.
Con - May kill the proposed investment as Iran and Pan Am
have indicated they would not proceed without some public
approval by USG.
- May force Pan Am into bankruptcy by denying them
only source of financial relief.
- Neglects fact that any OPEC government investment
in a major US company is an important matter calling
for responsible action (including a public explanation)
by the Administration.
- Failure to permit OPEC government investment in
a highly regulated industry would be taken as indication
that we wanted no OPEC government investment in our
economy.
CONFIDENTIAL
January 31, 1975
PRINCIPAL PROVISIONS OF TENTATIVE
ANNEX 1
AGREEMENT BETWEEN PAN AM AND IRAN
The agreement contemplates that the Iranian side will make available to Pan Am
an amount not to exceed $300 million. The principal provisions of the tentative
agreement are as follows:
1) Of the $300 million, an amount (say $55 million) will be used to acquire 55%
of the stock of Intercontinental Hotels Corporation, an off-shore hotel chain
wholly owned by Pan Am. The exact purchase price is yet to be negotiated.
Each side will have a right of refusal in the event either wishes to sell all
or any part of its IHC stock.
2) Out of the remainder of the $300 million, the Company will endeavor to acquire
at least 75% of the outstanding $389,500,000 of Pan Am's senior debt now held
by Institutional Investors at 2 substantial discount price satisfactory to Iran
and Pan Am. Up to $70 million of the amount remaining from the $300 million
after the acquisition of the Hotel Company stock and the discount purchase of
senior debt will be lent to the Company for its necessary cash needs.
3) The monies made available for the acquisition of senior debt and the Company's
cash needs will be in the form of a ten-year loan to Pan Am bearing interest
at a rate of 10½ per annum, with a commitment fee of 3/2% per annum. Since no
principal repayments will be required for the first three years, this will im-
prove the Company's cash flow for the first three years by a curulative amount
of roughly $60 million.
4) The agreement is subject to the condition that the banks which have presently
extended a line of credit amounting to $125 million, payable on September 30,
1975, will continue that line of credit into the future.
The funds lent by Iran shall share pari passu in collateral with the other
senior debt of the Company, but if the other lenders agree to extend their credit
on an unsecured basis, Iran will accept that its loan not be secured.
5) As part of the total transaction, Pan Am will make available to Iran warrants
entitling it to purchase six million shares of the Company's stock at any time
within ten years after the date of the agreement, at the lesser of $2.75 per
share or 15% premium of the average daily closing prices from the signing of
the agreement to one week prior to the first borrowing. The warrants would be
transferrable either through a public offering or in private transactions pro-
vided that, unless the Company otherwise agrees, no transferee can acquire
warrants to purchase a number of shares greater than 1% of the number of shares
of the Company stock then outstanding.
When fully exercised, those warrants would result in Iran acquiring 13%
of the issued shares (computed after the full exercise of the warrants), or
8% of the total authorized shares (41 million shares are now issued and out-
standing; 80 million are authorized).
6) Pan Am's management will include on the management slate of directors (now con-
sisting of 17 directors, but expandable to 20) one person nominated by Iran so
long as Iran continues to hold the debt or the shares acquired through the exer-
cise of the warrants. Non-camulative voting
7) It is understood that final implementation of the agreement will be subject to
requisite approvals by the pertinent U. S. regulatory agencies.
ANNEX 2
(Suggestion for Form of Administration
Statement Provided by Pan American)
DRAFT MESSAGE FROM SECRETARY OF STATE
Please deliver the following personal message from the
Secretary to the Foreign Minister soonest:
Dear Mr. Minister:
Representatives of Pan American Airways have informed the United
States Government of their discussions with regard to a possible
investment by the Government of Iran in Pan American Airways.
Although I understand that these discussions have not yet
been definitively concluded, I would like you to know that
this matter is receiving my personal attention and that of my
senior colleagues. In principle, my government would regard
such an investment favorably as a further contribution to the
close spirit of cooperation that exists between Iran and the
United States.
As you perhaps know, investments in American air transport
companies are subject to special laws and regulations and
possible review by one or more administrative agencies.
Although, in advance of such a review, it is not possible to
predict precisely how such laws or regulations might be applied
to any particular investment, I would hope that these problems
can be resolved in a manner satisfactory to your government.
AGENCY RECOMMENDATIONS
1.
CIEP recommends Options A-2 (or 3c if DOD raises
objections on grounds that the investment would breach
the Industrial Security Regulations) and B-3 (i.e. announce-
ment of approval via a joint US/Iranian statement).
2.
NSC recommends Options A-2 and B-3 (but notes that, in
its view, Pan Am may be overstating the need for a public
statement of approval by the U.S. G.).
3.
OMB recommends Options A-2 and B-1 (contingent upon an
acceptable NSC/DOD review of the national security impli-
cations.)
4.
Treasury recommends approval and feels positive public
statement should be made.
5.
Defense takes no position for or against but points out that
the investment as proposed would create problems with respect
to (a) their CRAF program and (b) their Industrial Security
Regulations unless special arrangements are made to (i) isolate
classified defense work in a separate subsidiary and (ii) insure
that American crews fly CRAF planes and (iii) provide that any
Iranian liens are subject to a CRAF call.
6.
Transportation recommends against the loan. DOT believes
that the loan would take pressure off Pan Am to take drastic actions
needed to return to long-run profitability (e.g. g. merger and/or
route restructuring). In DOT's view, the Administration should
refuse the loan, push a merger (preferably with TWA), work
on the Seven Point Action Plan and hope for the best.
DOT also believes that Iranian influence in Pan Am would inject
an undesirable element into CAB and Presidential decision
making processes in cases involving Pan Am. Added foreign
policy pressures resulting from Iranian influence might, in
DOT's view, prejudice route award and rate cases in Pan Am's
favor.
PAGE 2
7.
State generally favors the investment on foreign policy
grounds but its final decision is subject to further con-
sideration of the effects of Iranian influence on Pan Am.
8.
Commerce
File
THE WHITE HOUSE
WASHINGTON
Misa Dovor
February 6, 1975
MEMORANDUM FOR:
John W. Barnum, Transportation
Philip W. Buchen
Arthur F. Burns, Federal Reserve Board
James H. Cavanaugh, Domestic Council
Frederick B. Dent, Commerce
Michael Dunn, CIEP
Robert Elsworth, Defense
Alan Greenspan, CEA
Robert T. Hartmann
James T. Lynn, OMB
TO/
John O. Marsh, Jr.
Charles W. Robinson, State
Donald Rumsfeld
Brent Scrowcroft
William E. Simon, Treasury
Frank G. Zarb, FEA
FROM:
L. WILLIAM SEIDMAN
SUBJECT:
PROPOSED IRANIAN GOVERNMENT INVESTMENT
IN PAN AMERICAN AIRLINES
Attached is a decision memorandum on a "Proposed Iranian
Government Investment in Pan American Airlines." Please
forward your comments and recommendations to my office
by noon, Monday, February 10, 1975.
A more detailed outline of terms and discussion of basic
issues is also attached for your information.
If you have any questions, or if you anticipate a delay in
submitting your comments and recommendations, please telephone
my office immediately at 456-6537.
Attachments
CONFIDENTIAL
CONFIDENTIAL
ACTION
MEMORANDUM FOR
THE PRESIDENT
FROM:
L. William Seidman
SUBJECT:
Proposed Iranian Government
Investment in Pan American Airlines
As you know, initial negotiations have been completed
with respect to an Iranian Government investment of $300
million in Pan American Airlines. Because the controversial
issue of OPEC government investment is involved, both Pan
Am and Iran are seeking a favorable signal from the
Administration before proceeding further with the
transaction.
Any agreement reached by the parties would ultimately
be subject to CAB approval of matters relating to potential
Iranian control of Pan Am. A favorable Administration
decision would, therefore, not necessarily ensure successful
completion of the transaction. A negative signal would,
however, almost certainly stop the proposed investment.
Decision Required. The main decision required is
whether the Administration should approve in principle the
proposed Iranian investment in Pan Am.
Terms of Transaction. After completion of the trans-
action as now proposed, Iran would hold approximately $245
million (20-30%) of Pan Am's debt, have warrants to purchase
up to 13% of its equity and have one member on Pan Am's 17
member Board of Directors (see attached Annex I for further
details of transaction).
Basic Issues -- Several broader issues must be considered
in order to reach a decision on the Iranian/Pan Am request.
They are:
-- Our policy with respect to OPEC government
investment in the U.S.
--- Our policy with respect to recycling and the
impact of denial on the future flow of OPEC funds
to the US.
-- Foreign policy implications - especially Iranian/
U.S. relations.
DECLASSIFIED
E.O. 12958, Sec. 3.5
NSC Memo, 11/24/98, State Dept. Guidelines
By WHM NARA, Date 11/20/00
- 2 -
-- Foreign government influence in key U.S. firms
-- Injection of an undesirable foreign policy element
into the CAB and Presidential decision making
process in cases involving Pan Am.
-- Effect on Pan Am's long run economic viability.
Discussion of Key Issue: OPEC Government Investment
in U.S. - One of the principal objectives of our recycling
policy is to encourage OPEC nations to make long term
constructive investments in the consuming nations. Such
investments contribute to our current balance of payments,
help alleviate the current capital shortage, and give the
OPEC countries a stake in our economy which should provide
some incentive for them to refrain from actions which would
have a negative effect on our economy and their investments.
An interagency review of foreign investment in the U.S. is
underway and, while not complete, it is possible to say that
all but the most extreme views would permit some foreign
government investment in US firms - including firms like Pan Am.
Our existing laws and regulations are such that there is
minimum danger that a foreign investor could use his invest-
ment here in a way that would cause serious harm to our
economy or national security. However, a major reservation
has been raised concerning the political and economic
influence that a foreign government might obtain through
substantial investments. Although the substance of these
concerns have never been clearly defined, those that hold
this view maintain that a foreign government could make
subtle use of such influence to harm our national or economic
security interests but in a manner that would put it beyond
the reach of existing law.
There is an added difficulty in the present case in
that Pan Am is regulated by the CAB and, in some cases, the
President. The Department of Transportation is concerned
that Iranian investment in Pan Am would inject additional
foreign policy considerations into the deliberations of the
CAB and the President in making decisions involving Pan Am
or other international carriers. On the other hand, other
agencies look upon CAB and Presidential regulations as an
added safeguard to ensure that the Iranians would not use
their investment in a way contrary to our national interest.
Advantages of a Favorable Decision
1. A favorable decision would indicate to other
potential OPEC investors that the U.S. is willing to accept
constructive long term OPEC government investment.
- 3 -
2. The investment would set a useful precedent for
the type of OPEC investment we would welcome (i.e. mainly
debt with a relatively small equity interest in a firm in
a highly regulated industry).
3. Denial would be interpreted by OPEC nations as an
indication that we intended to limit their investment in
the U.S. and could have a major negative effect on such
investment here.
4. Because of its generally favorable features, the
transaction provides a good test case to sample Congressional
and public reaction to substantial OPEC investment in U.S.
companies.
5. The investment would avert another Pan Am cash
crisis in late 1975 and might provide the type of medium
term financial relief necessary to enable it to consummate
a merger needed to create a viable airline.
Disadvantages of a Favorable Decision
1. The investment might take pressure off Pan Am to
take the drastic actions required to return to long run
profitability (e.g. merger or route restructuring).
2. Iranian influence in Pan Am would inject a new,
and what some consider an undesirable, element into CAB
and Presidential decision making in cases involving Pan Am
and other international airlines.
request for
if approved,
3. Further Pan Am financial problems could lead to
another Iranian bailout which would increase Iranian
influence in Pan Am and thereby set precedents for larger
shareholdings in US companies by foreign investors.
small
4. Unless special arrangements are made by Pan Am
and Iran, the Iranian investment might prejudice the
availability of Pan Am planes for the CRAF fleet and/or give
Iran access to classified information.
this will either spell happen A out the
Agency Recommendations
or Tell AVT. the P. what risk is
(1) Treasury, State, Commerce, OMB, CIEP and NSC all
favor approval of the investment (subject to satisfaction
this to to
general f
permit an
intelligent
decission.
- 4 -
of DOD requirements re CRAF and classified contracts). The
main reasons for their recommendations are the positive
effect it would have on (i) our prospects for attracting
more OPEC government investment and influencing its movement
into constructive, long term ventures in the US and (ii)
the short term financial condition of Pan Am.
(2) The only dissenting agency is Transportation which
believes the investment will prevent needed restructuring
of Pan Am and would inject an undesirable foreign policy
aspect into CAB and Presidential decision-making which could
have a profound affect on US international aviation decisions.
(3) Defense takes no position for or against but points
out that the investment would create problems with respect
to availability of Pan Am planes for CRAF fleet and isolation
of Pan Am's classified work from Iranian access unless special
arrangements are made by Pan Am and Iran.
Initial Congressional and Labor Reaction - The subject
of OPEC investment in the U.S. is already an important issue
in Congress as several bills to restrict or limit foreign
investment have been introduced. Any decision on the
Iranian case will undoubtedly evoke Congressional comment.
Pan Am representatives have consulted a number of key
Senators and report that so far they have encountered no
Need
adverse reaction. Views ranged from Senators Church,
Williams and Percy, who were reported to be enthusiastic,
Cotton's
to Senators Jackson and Magnuson who both indicated they
would remain neutral.
views
According to Pan Am, initial contacts with the Teamsters
and the AFL-CIO indicates that labor will not have major
objections to the transaction.
My Recommendation: I recommend
Domatec Comical - approval
Approve Iranian Investment in Pan Am
Disapprove Iranian Investment in Pan Am
Will discuss
- 5 -
Nature of Public Statement - If you decide to approve
the Iranian investment, you should then decide whether to author
incure
rewritten
a public statement to satisfy the Iranian and Pan Am desire
for public Administration endorsement of the principle of
the transaction.
A public statement could have advantages in that it
(1) would indicate clearly the Administration position on an
issue of importance to Iran and other OPEC investors (2) might
Does
be used to reemphasize to Iran that the transaction is subject
to CAB approval and conditional upon satisfactory arrangements
with DOD with respect to the CRAF fleet and classified con-
tracts. There would be particular advantages in a parallel
or joint statement with Iran in that Iran would clearly
acknowledge that it recognized the need for DOD and CAB
approval and that it had no desire to control the management
or operation of Pan Am. Such a statement would greatly
assist in allaying public and Congressional fears of an OPEC
takeover.
The main disadvantages of a USG public statement are
that (1) it might appear that the Administration was favoring
Pan Am or trying to influence the ultimate CAB decision and
(2) it could set a precedent leading to similar requests
require
from other investors.
Agency views - The agencies favoring approval also favor
a public statement of support making it clear that the
the
transaction is subject to CAB approval and conditional upon
working out acceptable arrangements with DOD concerning
No,
availability of Pan Am planes for the CRAF fleet and Iranian
=
of
access to classified defense material.
CAB the
The NSC. and the CIEP strongly recommend that we
condition any official statement of approval on issuance
of a parallel or joint statement by Iran in which the Iranian
4
Porines he
government clearly acknowledges that (1) the transaction is
P
5
subject to CAB approval and satisfactory working out of DOD
requirements and (2) it has no desire to control management
or operation of Pan Am. A joint statement could be made
quite naturally in the context of the Joint Commission in
order to please the Shah.
better atternative?
Approve Joint or Parallel US/Iran
State + Transportal
Statements
lssue statement
Approve Unilateral US Statement
of approval along
Disapprove Public Statement
w/ their Iran
Will Discuss
Counter parts.
CONFIDENTIAL
January 31, 1975
PRINCIPAL PROVISIONS OF TENTATIVE
AGREEMENT BETWEEN PAN AM AND IRAN
The agreement contemplates that the Iranian side will make available to Pan Am
an amount not to exceed $300 million. The principal provisions of the tentative
agreement are as follows:
I) Of the $300 million, an amount (say $55 million) will be used to acquire 55%
of the stock of Intercontinental Hotels Corporation, an off-shore hotel chain
wholly owned by Pan Am. The exact purchase price is yet to be negotiated.
Each side will have a right of refusal in the event either wishes to sell all
or any part of its IHC stock.
2) Out of the remainder of the $300 million, the Company will endeavor to acquire
at least 75% of the outstanding $389,500,000 of Pan Am's senior debt now held
by Institutional Investors at a substantial discount price satisfactory to Iran
and Pan Am. Up to $70 million of the amount remaining from the $300 million
after the acquisition 'of the Hotel Company stock and the discount purchase of
senior debt will be lent to the Company for its necessary cash needs.
3) The monies made available for the acquisition of senior debt and the Company's
cash needs will be in the form of a ten-year loan to Pan Am bearing interest
at a rate of 10½ per annum, with a commitment fee of 1/2% per annum. Since no
principal repayments will be required for the first three years, this will im-
prove the Company's cash flow for the first three years by a cumulative amount
of roughly $60 million.
4) The agreement is subject to the condition that the banks which have presently
extended a line of credit amounting to $125 million, payable on September 30,
1975, will continue that line of credit into the future.
The funds lent by Iran shall share pari passu in collateral with the other
senior debt of the Company, but if the other lenders agree to extend their credit
on an unsecured basis, Iran will accept that its loan not be secured.
5) As part of the total transaction, Pan Am will make available to Iran warrants
entitling it to purchase six million shares of the Company's stock at any time
within ten years after the date of the agreement, at the lesser of $2.75 per
share or 15% premium of the average daily closing prices from the signing of
the agreement to one week prior to the first borrowing. The warrants would be
transferrable either through a public offering or in private transactions pro-
vided that, unless the Company otherwise agrees, no transferee can acquire
warrants to purchase a number of shares greater than 1% of the number of shares
of the Company stock then outstanding.
When fully exercised, those warrants would result in Iran acquiring 13%
of the issued shares (computed after the full exercise of the warrants), or
8% of the total authorized shares (41 million shares are now issued and out-
standing; 80 million are authorized).
6) Pan Am's management will include on the management slate of directors (now con-
sisting of 17 directors, but expandable to 20) one person nominated by Iran so
long as Iran continues to hold the debt or the shares acquired through the exer-
cise of the warrants.
7) It is understood that final implementation of the agreement will be subject to
requisite approvals by the pertinent U. S. regulatory agencies.
fill
For Immediate Release
Washington, D.C., February 7, 1975---O. Roy Chalk, former head of Trans
Caribbean Airways (now American Airlines), D.C. Transit System of Washington, D.C.
and International Railways of Central America, stated today that he was confident there
was a U. S. solution to the financial plight of Pan American World Airways without
resort to foreign intervention by the Government of Iran.
Mr. Chalk stated he is prepared to submit a definitive proposal for the
acquisition of Pan American and intends to meet with General William Seawell, President
of Pan American in order to discuss the same.
Mr. Chalk continued, "I am aware that if I desire to proceed further with the
matter, I will ultimately be required to obtain prior Civil Aeronautics Board approval of
any contract to acquire 10% or more of the voting securities, capital and/or properties
of Pan American, which I am prepared to do."
Mr. Chalk further stated that over the past year, "I have discussed my solution
of the subject with persons of importance in Government, with leading banks, with air-
line executives and others who are interested in resolving the financial problems of Pan
American. The reaction in all cases has been most encouraging."
He continued, "Because of the Iranian emergence into the field, the time has
come for immediate action by U. S. businessmen to avert a foreign takeover. An
Iranian group, at this moment, is being guided through the halls of Congress by a Pan
American vice president, apparently lobbying for Congressional support."
Mr. Chalk expressed the opinion that, "The contemplated foreign takeover by
a Middle East power of any U.S. air carrier would be a severe blow to our international
prestige and our national pride, as well as constituting a possible serious military
disadvantage and blunder." He pointed out that, "Most U. S. jet aircraft in inter-
national operations are registered in the CRAF Program, our Civilian Air Force Military
Reserve. I intend to so inform General Seawell and at the same time discuss my proposal
with him."
######
For further information contact: Mrs. Dianna McCray, 3600 M Street, N.W.,
Washington, D.C. 20007 - Tel. 202 - 965-9700
Roy Chalk
Aggusit GERALD ? FORD
COPY
O. ROY CHALK
File
February 13, 1975
The President
White House
Washington, D. C.
My dear Mr. President:
As you are aware, Pan American and the
Iranian Government have been negotiating an
agreement whereby the Iranians would provide
Pan American with substantial financial resources
in exchange for an equity in the hotel business
and some needed technical assistance. With the
concurrence of the Civil Aeronautics Board they
would be granted a position on Pan American's
Board of Directors and eventually thirteen
percent of the common stock. In addition, the
Iranian Government would become Pan American's
largest creditor. Under long established Board
precedent, as well as common business practice,
the consummation of these arrangements would
result in the Iranian Government having a sub-
stantial measure of control over Pan American
and the operation of its fleet.
Moreover, to the best of my knowledge,
the Iranian Government does not plan, nor could
it contribute either the managerial or financial
skills necessary for any long term solution to the
Pan American problem.
But apart from the prospect that the
Iranian deal may prove to be a band-aid where
surgery is necessary, there are other aspects
which create major public interest problems.
GERALDA FORD LIBRADY
February 13, 1975
Page 2
In the first instance, you may note that
Pan American is the largest United States flag
contributor to the United States Civil Reserve
Air Fleet (CRAF) which is our Air Force's back
up logistics service in case of national emergency.
As you are aware, the CRAF activity includes a
dedication of crews, maintenance facilities, and
the other necessary components for immediate
operational capability.
Pan American supplies over forty percent
of the Boeing 747 capacity in CRAF and over
twenty-nine percent of the overall United States
flag capability in CRAF. Patently, the prospect
of foreign government control of Pan American,
even if such control is less than total, is
potentially a serious matter from the standpoint
of our national interest and one which warrants
public discussion before the deal is consummated.
There is another serious question which
I believe should be discussed before this arrange-
ment is finalized. I refer to the precedent which
would be established by the Iranian bail-out of
Pan American. Thus, if the United States Govern-
ment is prepared to endorse the control of Pan
American by a foreign oil power, could the United
States later react negatively were this or any
other foreign interest to seek control of United
States communication companies, utilities, banks,
insurance companies or other vital United States
businesses? In short, is the proposed Iranian
investment in Pan American a trojan horse for
other investments in potentially sensitive areas?
It is against this background that I have
accelerated my efforts to develop a United States
business interest approach to Pan American. As
implied, it has been my long held view that Pan
American is a company which has grown beyond the
ability of any foreseeable management to operate
efficiently and economically. Nor are there, in
my judgement, policy changes which the United
States Government could or should make to create
a more salubrious economic climate for Pan American
profitability. I do, however, have a plan that
could retain the economic status of Pan American
as a viable corporate entity.
February 13, 1975
Page 3
I might say that in the discussions which
I have had with informed industry observers and
interested government officials there was a con-
siderable agreement with my judgement in this
regard.
Accordingly, when the first news of the
Iranian deal became known, I embarked upon a major
effort to place my views before the major United
States flag carriers. These discussions are
currently in process. It is my intention, should
these carriers respond affirmatively, as I
anticipate, to complete a plan for a joint offer
to be made to Pan American for the acquisition of
its assets and the assumption of its liabilities.
I believe that I can offer greater security to
Pan American's creditors, greater long term job
opportunities for its loyal and effective employees,
and a reasonable return for its shareholders - and
this can be done without any sacrifice of impor-
tant United States interests.
Certainly, with an arrangement of this
type in the offing, there is no sound reason why
the United States Government should be stampeded
into approval of the Iranian bail-out.
Please accept my kindest personal regards.
Sincerely,
O. Roy Chalk
bcc:
Mr. Michael Duvall
Executive Office of the President
BERALD FORD LIBRARY
5/21/75
NEA/IRN:BBMorton
UNCLASSIFIED
(Drafting Office and Officer)
DEPARTMENT OF STATE
file
Memorandum of Conversation
May 17, 1975
DATE:
Iranian Loan/Investment in Pan Am;
in Mr. Sober's office
SUBJECT:
Iran Air Discount Fares
Lt. General Ali Mohammad Khademi, Managing Director,
PARTICIPANTS:
Iran Air.
Sidney Sober, Deputy Assistant Secretary, NEA.
Robert Binder, Assistant Secretary, Department of
Transportation.
Michael Styles, Director, EB/AV.
Byron Morton, NEA/IRN.
COPIES TO:
NEA
Dept. of Transportation
NEA/IRN (2)
Pan Am Task Force (see
EB/AV
attached list)
Amemb Tehran
Mr. Sober opened the conversation by thanking General
Khademi for accepting his invitation to come in for an in-
formal talk about the proposed Iranian arrangement with Pan
Am. Although the Department has no direct role in the nego-
tiations, it does maintain an interest in them, wants to be
helpful if possible and wants to be sure that the parties
are well aware of all issues involved. Mr. Sober recalled
the February 16 joint release by which the USG had indicated
it had no objection in principle to the proposal and which
had referred to the fruitful consultations and warm coopera-
tion between our two governments.
General Khademi began a discussion of the history of
the proposal by pointing out that the Shah had made it clear
from the start that he does not intend for Iran to gain any
control of Pan Am. He does want to help an airline that
has been of great assistance to Iran. Khademi said that
the deal goes back to an approach by Pan Am Chairman Seawell
to Iran in August 1974. Subsequent:discussions have gone
relatively smoothly and only three major problem areas
remain:
1. The management of Intercontinental Hotels Corp.
(IHC) -- severance of IHC from Pan Am, as contemplated in
FORM
DS-1254
3-61
UNCLASSIFIED
Fare & LIBRARY GERALD
UNCLASSIFIED
- 2 -
the talks to date, would cause a change in the handling
of overheads and thus in the IHC profit situation. Also,
the flow of management talent between IHC and Pan Am
would be different once they are separated. Iran wants
some guarantees against adverse effects of the severance.
2. Iran is not clear about U.S. regulations on the
right to register the Pan Am stock it may acquire. Its
U.S. advisers are working on this.
3. Pan Am wants a clause in the agreement that Iran
will not sell 1% or more of Pan Am's total stock to any
single party without Pan Am's concurrence. The Iranian
side does not feel comfortable with such a formal restric-
tion, although it has no plans for a quick sell-off of
stock.
There are also some technical problems to be worked
out between Pan Am and its current creditors.
Khademi said that he thought that a preliminary agreement
setting the principles on which the final agreement would
be based could be signed fairly soon. The final agreement
would probably take an additional six months to complete.
Mr. Binder and Khademi discussed the possibility that the
CAB could carry out its consideration of the proposal on
the basis of the preliminary agreement.
Mr. Sober said we have been in touch with Pan Am,
which has told us it has kept the Iranian side fully in-
formed of all the financial issues -- including the contingency
that the Iranian loan would not of itself be sufficient to
solve Pan Am's problems and that a merger with another U.S.
airline might well be necessary. He said that there was a
strong body of opinion in Washington which felt a merger
would be required. Khademi said that Pan Am had been frank
about this possibility and went on to discuss the possible
merger partners. He indicated that Iran would have no prob-
lem with a merger. Mr. Sober noted that any proposal for
a merger or major route restructuring for Pan Am would have
to be carefully studied in light of the possible impact on
other air carriers and the domestic and foreign air commerce
of the United States; the USG is not in a position at this
UNCLASSIFIED
GERRAD FORD LIBRAS
UNCLASSIFIED
- 3 -
time to tell Pan Am or the GOI whether it would support
or oppose such a transaction, and our position could be
established only after a thorough assessment of the
particular transaction and its implications for our
air commerce. Mr. Binder agreed and described the
Federal Action Plan, under which a policy study is
now under way on governmental support for U.S. inter-
national air carriers. He emphasized that he could not
predict the outcome of the study. General Khademi in-
dicated his understanding of these points.
General Khademi brought up the issue of the 40%
discount Iran Air wants to give GOI employees and Iranian
students on flights to and from the United States. He
noted that the discount was ordered by the GOI, is in
effect on routes to all other countries served by Iran
Air and has caused no problem for competing airlines.
Mr. Sober pointed out that the U.S. regulation has been
in effect for years and applies across the board ---
there is no intention to single out or discriminate
against Iran. The Iranian proposal presented us with
a serious problem in that no airline now enjoys the
right to offer such a discount. We had proposed con-
sultations, but Iran should understand how difficult
this issue was for us. Khademi expressed appreciation
that the U.S. had permitted the discount to stand for
flights already scheduled, pending consultations on the
issue. He said that the Iranian Embassy will be sending
a note proposing talks to start either June 2 or June 16.
The meeting ended with expressions of mutual appre-
ciation for the opportunity to talk together frankly and
constructively.
Attachment:
Pan Am Task Force
distribution list.
UNCLASSIFIED
FORD & LIBRARY 9ERALD
NEA/IRN: BBMorton/bk 5/21/75
Honorable Charles W. Robinson
Honorable Roderick Hills
Under Secretary for Economic Affairs
Counsel to the President
Department of State
The White House
Room 208
West Wing
Washington, D. C. 20520
Washington, D. C. 20500
Honorable Edward C. Schmults
Honorable John M. Dunn
Under Secretary
Deputy Executive Director
Department of the Treasury
Council on International
Room 3430, Main Building
Economic Policy
Washington, D. C. 20220
Room 208
Old Executive Office Building
Honorable John K. Tabor
Washington, D. C. 20506
Under Secretary
Department of Commerce
Mr. James Cannon
Room 5840
Domestic Council
Washington, D. C. 20230
The White House
West Wing
Honorable William P. Clements, Jr.
Washington, D. C. 20500
Deputy Secretary
Department of Defense
Honorable L. William Seidman
The Pentagon
Assistant to the President
Room 3E942
for Economic Affairs
Washington, D. C. 20301
The White House
West Wing
Honorable Thomas E. Kauper
Washington, D. C. 20500
Assistant Attorney General
Department of Justice
Honorable Michael Raoul-Duval
Room 3109
Associate Director
Washington, D. C. 20530
Domestic Council
Room 216
Honorable James T. Lynn
Old Executive Office Building
Director
Washington, D. C. 20506
Office of Management and Budget
Washington, D. C. 20503
Honorable Alan Greenspan
Robert Hormats
Chairman
Council of Economic Advisers
NSC Room 361, Old Executive Off Bld
Room 314
Old Executive Office Building
Robert Oakley
Washington, D. C. 20506
NSC Room 386 Old Exec Off Bldg
Honorable Arthur F. Burns
Chairman
Federal Reserve System
Federal Reserve Building
Room B2046
Washington, D. C. 20551
GERALD FORD LIBRARY
PAN AM TASK FORCE