In a deal that reflects the gloomy state of the North American airline industry, Tempe, Arizona-based US Airways Group, Inc. (NYSE:LCC) has laid out a concrete proposal to purchase Fort Worth-based American Airlines (NasdaqOTH: AAMRQ) out of bankruptcy. The all-stock deal would create a new airline with a market capitalization of roughly $8.5 billion and an intrinsic value of at least $15 billion. By comparison, Delta Air Lines, Inc. (NYSE:DAL) Airlines's current market capitalization is about $8.6 billion.
Who Gets What?
The deal would involve the transfer of about 70 percent of the post-merger company to American Airlines's former creditors. The remaining 30 percent of the company's stock would pass to current US Airways shareholders. The precise details of the deal remain to be worked out. However, a dual non-disclosure agreement prohibits negotiators on either side from discussing its terms in greater detail.
Since the deal is expected to be debt-neutral, it is not unreasonable to expect US Airways's share price to appreciate significantly in the months following the merger. The company's current book value sits at around $15 per share. Its average target price is around $16 per share. By these valuations, current shareholders stand to earn a premium of between 17 and 25 percent as a result of the deal.
However, it is believed that American Airlines's creditors are holding out for an 80 percent stake in the new company. Despite this snafu, most industry observers expect the final agreement to conform to the US Airways proposal. It is unclear whether American's current common shareholders would receive any compensation as part of the deal. The company's shares are valued at roughly $.80 apiece on over-the-counter markets.
American Airlines was once among the giants of the American aviation industry. The company still manages nearly 3,500 daily flights in the Western Hemisphere and parts of Europe. Wholly-owned subsidiary American Eagle operates discount flights to tropical Western Hemisphere destinations like Mexico, Jamaica and the Bahamas. The company employs over 80,000 full-time workers, including about 8,000 full-time pilots. As a result of its bankruptcy filing, it has frozen its workers' pensions and remains locked in tight labor negotiations with its pilots' and flight attendants' unions.
Although it is not without its flaws, US Airways is markedly healthier than many of its rivals. For years, it has toed the line between offering no-frills discount service in the mold of Southwest Airlines Co. (NYSE:LUV) and competing with full-service carriers like Delta and American. The innovative, low-cost Southwest offers the lowest prices for many flights but doesn’t provide many of the little perks. Lately, Southwest’s stagnant sales and decreasing net income isn’t saying much for the model. However, the full-service airlines like Delta are seeing the same problems with sales. Delta’s sales grew 2% in the last year while earnings in Q3 2012 were almost twice as much as earnings in Q3 2011. With profit margins for Southwest and Delta hovering around 2-3%, is there room for the extra capacity? Possibly, since US Airways has figure out a way to have profit margins almost double these competitors.