By
AnalytixInsight
:
We provide fundamental analysis as well as assessments of
corporate actions and dividend and earnings quality reports on over
40,000 globally traded equities. We used our online platform to
explore if Alaska Air Group Inc. (
ALK
) and American Airlines (AAMRQ.PK) could tie the knot.
American Airlines
, whose parent company
AMR Corporation
is currently under bankruptcy protection, is weighing options for
its future. Tom Horton, CEO of American's parent AMR Corp.,
stated
that he is now evaluating "a range of strategic options, including
potential mergers."
Wall Street seems to be pumping for a merger with
US Airways
(
[[LCC]]
) as the only alternative, primarily because the two airlines share
complementary route networks, and because the other two logical
candidates -
United-Continental
(
UAL
) and
Delta
(
DAL
) are both too big at this point to have a prayer of pushing the
merger with American past regulators. And given the existing market
share dynamics - United-Continental and Delta have about 60% of the
market, while American and US Airways have about 20% and 10%
,respectively - it certainly makes operational sense for the two
airlines to merge, not the least to stay competitive with the
bigger networks.
The only problem with this scenario: US Airways is still
struggling from its own merger with America West from a few years
back.
We ran our Corporate Actions analysis on our online platform for
US Airways; LCC has a relatively small book value (i.e. equity
support) and would find it hard to make meaningful acquisitions in
this peer group. Its existing level of intangible assets is also on
the high side compared to its peers - the other American/domestic
carriers. We also doubt US Airways' ability to fund the merger.
LCC would seem to have a hard time raising additional
debt.
With debt at a relatively high 36.6% of its enterprise value
compared to an overall benchmark of 25% (note: the peer median is
currently 29.0%), and relatively tight interest coverage level of
1.7x, LCC would have a hard time raising much additional debt. The
company has a constrained profile in terms of its ability to take
on further debt.
Overall, while it appears that Wall Street sees US Airways as
the preferred suitor, we do not think this merger would produce a
strong combined entity that would improve upon the valuations of
the two constituents. Our conclusion: A bad idea for the
shareholders.
But there are other candidates who might offer more interesting
choices.
We ran a screen on potential acquirers within the domestic
airlines sector.
We limited the analysis to domestic airlines because of current
U.S. law that prohibits foreign entities from having a majority
stake in airlines here.
Alaska Air Group Inc.
(
fundamental research report here
), came up as a viable suitor. The company has plenty of borrowing
capacity, and the valuation dynamics to effect a merger with
American Airlines.
Here are our detailed analytics on
M&A Action
for
Alaska Air Group Inc.
(
M&A report here
), also run on on our platform.
Why acquire?
Companies typically acquire to realize economies of scale, scope,
gain customers, bundle complementary products, or gain vertical
integration. From an investor's perspective, these business reasons
fall into natural screening categories that include: I. buying
companies to boost growth expectations; II. buying to realize cost
synergies; and III. buying earnings through acquisitions that
increase EPS.
(click to enlarge)
Alaska Air Group Inc.
(
ALK
) passed all four of our tests as a possible Acquirer.
ALK could potentially acquire other companies within this
peer group.
The market's current relatively low growth expectations for ALK
imply it would need acquisitions to grow. The company's book value
of $1,218 million gives it the size to make acquisitions in this
peer group. In addition, its comparatively low proportion of
intangible assets suggest that the company has some room to acquire
- even possibly using its equity which is currently trading at a
higher price to book (P/B) relative to peers. In addition, the
company's low debt to market capitalization (relative to peers) and
good interest coverage suggest that the company can also issue debt
to finance acquisitions.
(click to enlarge)
Additional operational bonus: American already has a partnership
with Alaskan. Plus Alaskan Airlines is focused on the West Coast,
an area where American Airlines could use expansion. Should this
merger take place, we think shareholders can safely applaud the
transaction.
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
Disclaimer
:
www.capitalcube.com/index.php/blog/disclaimer
See also
Capital Product Partners' CEO Discusses Q2 2012
Results - Earnings Call Transcript
on seekingalpha.com