No Merger of Equals for US Airways
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It's no secret that US Airways (NYSE: LCC) is aiming to buy bankrupt American Airlines. In a conference call management did not want to answer merger related questions but it became the prime topic of the discussion anyway. And it makes sense why so many people would care. This would be one of, if not the biggest, events in US Airways history. But as much as the discussion is being phrased as a takeover over American, this is not meant to be a situation where US Airways gains the upper hand.
The wave of mergers
In the past several years we have seen the number of competitors in the airline industry shrink dramatically. However in each case, the acquiring company's name survived and the operations were mostly run by the acquiring airline. United's acquisition of Continental may be considered an example where the acquired airline retained a larger degree of control, but this is out of the norm for airline mergers.
The United Continental (NYSE: UAL) merger is the closest to a merger of equals, but most other acquisitions follow the pattern of a larger, more prosperous airline taking control of a smaller weaker airline. This follows the typical takeover position where a larger company pays a premium to purchase a smaller company, a pattern particularly in focus for the Southwest and SkyWest deals. For US Airways, the outcome would be very different from this pattern; however, shareholders could still benefit in the long run.
Who's controlling who?
In most of the scenarios above, the larger carrier took over the smaller carrier. But for a US Airways American merger the reverse would be true. American Airlines is larger than US Airways by almost every measure, however American is for sale due to its bankrupt position.
It appears the starting offer from US Airways is a 30 percent stake for US Airways shareholders and a 70 percent stake for American Airlines stakeholders. While this deal itself shows the control American would exert over the combined entity, American could wind up with an even larger stake. American Airlines CEO Tom Horton has stated that American's stakeholders should have at least 70 percent and some creditors are discussing up to 80 percent. Based on these proposed stakes and the size of each airline, it becomes clear American's stakeholders would be in effective control of the combined airline; however, there is a significant chance it would be run by US Airways management.
In addition, the US Airway's name would go the way of the Northwest Airlines name and the combined entity would take the name American Airlines. But while the US Airways name may no longer exist, US Airways shareholders would find themselves part owners of the world's largest airline. The US Airways proposal put the value of the combined airline at $8.5 billion, about $500 million larger than United Continental's market capitalization and roughly $1.5 billion less than Delta's. The following table breaks down the value of US Airways shares at various deal amounts assuming an $8.5 billion combined value.
Calculations based on 162.4 million shares outstanding
It is quite reasonable to expect that US Airways will not be willing to settle for an amount that reduces the value of the shares meaning the final deal would likely be closer to the 30/70 split. Creditors of American Airlines calling for a 20/80 split are unlikely to get their wish as US Airways would balk at such an offer. But with a trend of airline consolidation and US Airways eager to merge, the airline is likely to be taken over and American Airlines seems like the most suitable partner.
The question then becomes how well the merger can be executed. While the United Continental merger has been widely criticized, the Delta Northwest merger had better (but not perfect) execution and has served as a role model for other large airline mergers. US Airways feels a merger is needed to compete effectively against a larger United and Delta, but management at American has not been as eager. Some proposals have included emerging as a stand alone airline and then buying US Airways, a scenario where it is uncertain exactly what US Airways shareholders would receive. But no matter which of the current merger scenarios plays out, it is clear in the event of a merger the surviving name will be American Airlines and American's stakeholders will have a majority of the merged airline.
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