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            B R E A K F A S T   W I T H   T H E   F O O L
                      Monday, November 6, 2000

benjamin.rogers@enron.com
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CONTINENTAL, NORTHWEST DEAL DURING TRIAL
With their federal court trial at hand, the two major air
carriers do a deal.

By Tom Jacobs

Feeling the heat of the Department of Justice's (DOJ) antitrust
trial against them, defendants Northwest Airlines (Nasdaq: NWAC)
and Continental Airlines (NYSE: CAL) announced today an
agreement intended to end the dispute. The DOJ sued the airlines
in 1998 over a deal giving Northwest 54% voting control over
Continental -- preventing Continental's takeover by Delta Air
Lines (NYSE: DAL). Under the deal, Continental would buy back
Northwest's common stock. The parties will ask the federal judge
to delay the trial, which started last week, while the carriers
work out the details.

A CAREFUL DEAL
The deal has two goals: to address the DOJ's belief that the
Northwest-Continental combination would lead to higher prices
for consumers, and to retain the benefits of the two air powers'
alliance.

The pact extends the alliance through 2025 and changes the
Northwest-Continental relationship. According to the deal,
Northwest will pay $450 million for 6.69 million Continental
Class A shares, and hold on to 2.6 million Class B shares.
Continental will recapitalize, reclassifying each Class A share
into 1.32 shares of Class B common stock. Continental will issue
Northwest a special series of preferred stock, which will give
Northwest blocking rights over certain Continental business
combinations and change of control between Continental and a
third party. Continental can redeem its preferred stock under
certain conditions, such as a change of control at Northwest.

A DELICATE BALANCE
The industry and the government are groping in the
post-deregulation era to weigh the needs of consumers against
cutthroat worldwide airline competition. For example, the DOJ is
separately reviewing United Airlines' (NYSE: UAL) $4.3 billion
purchase of US Airways Group (NYSE: U). All the airlines have
formed alliances similar to Northwest's and Continental's,
involving the now-common practice of code-sharing, which means
putting customers who buy tickets with one airline on the other
airline's flights, and offering reciprocal frequent-flyer
programs and airport lounge rights.

The trial began last week after a week's delay, during which
settlement talks continued. But the trial pressure ultimately
caused a change at Northwest, which rejected earlier this year
Continental's buyback offer. At that time the two agreed to
reduce Northwest's power over Continental's daily operations --
but it apparently didn't satisfy the DOJ.

Pending the judge's decision on the seven-day delay, Continental
and Northwest plan to execute the agreement in one week. They
expect it will take two months to close the deal, which would be
subject to settlement of the litigation with the DOJ.
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NEWS TO GO

The Wall Street Journal reported that tobacco companies
Lorillard Tobacco, owned by Loews Corp. (NYSE: LTR), and Liggett
Group, owned by Miami's Vector Group (NYSE: VGR), will announce
a $8 billion settlement in federal court tobacco litigation in
Brooklyn. The move is said to include a 30-year payment
schedule, with Lorillard paying the bulk -- $7.5 billion. The
Journal reports that the parties hope to insulate themselves
from liability from the Florida state court $144.87 billion
judgment. The two tobacco companies split from their colleagues
after the Florida verdict and have been negotiating with other
plaintiffs' groups seeking a class action before U.S. Judge Jack
Weinstein of Brooklyn, famed for his handling of mass tort
litigation cases such as the Agent Orange and asbestos
class-action lawsuits.

Santa Clara, Calif. computer chip maker Transmeta reportedly
plans to hold its initial public offering this week. Transmeta
makes microprocessors said to use less power and extend battery
life in PC notebooks and Internet appliances. Expected investor
demand led Transmeta last Friday to raise its projected IPO
share price range to $16-$18 from $11-$13. Apparently, interest
remains high despite last week's big news that IBM (NYSE: IBM)
canceled plans to use a Transmeta chip in a new laptop computer.

Computer networking product maker 3Com (Nasdaq: COMS) agreed to
settle shareholder lawsuits related to its 1997 $8.5 billion
merger with U.S. Robotics. The settlement will be for $259
million. Shareholders alleged that 3Com inflated its stock price
by giving rosy financial projections and delaying -- or hiding
-- the news of a huge backlog of unsold U.S. Robotics modems,
while executives of both companies sold 4 million shares with
3Com stock at its peak. Those who bought 3Com stock between
April 23 and November 5, 1997, are eligible to share in the settlement.

After last week's decision by media giant Bertelsmann AG to ally
with Napster and finance its move to a royalty-paying music
service, two top executives of Bertelsmann's BMG Entertainment
unit quit. Chairman Michael Dornemann and President Strauss
Zelnick said they would depart, reportedly unhappy with new
directions at Bertelsmann and BMG's reduced role in television
and the Internet. Under Zelnick, BMG's album market share
increased 50%, from 13% to 20%, and the company grew to own more
than 200 record labels in 54 countries. Zelnick exits with a
sweet severance package estimated at between $20 million and $50
million.

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