Based in Santa Fe, México, Volaris Aviation Holding (VLRS) scheduled a $376 million IPO with a market capitalization of $1.3 billion at a price range mid-point of $13, for Wednesday, September 18, 2013.
Nine IPOs are scheduled for this week, 11 for next week. The full IPO calendar can be found at IPOpremium.
S-1 filed August 30, 2013
Manager, Joint Managers: Deutsche Bank; Morgan Stanley; UBS
Co Managers: Barclays; Cowen; Evercore; Santander
VLRS is a low-cost airline targeting friends and relatives in Mexico. VLRS also serves 10 airports in the US and 30 airports in Mexico.
VLRS appears to have a cost advantage even though the average ticket is $109, and approximates a bus far for equivalent distances.
Top line revenue grew 32% for 2012 vs 2011, and also grew 19% for the June '13 six months vs June '12 six months.
40% of the IPO proceeds are going to selling shareholders. Most of the amount going to VLRS itself, $211 million, is allocated to pre-delivery payments for aircraft.
In 2012, the average load factor was 82.9%, compared to an average load factor of 76.0% for the other Latin American publicly traded airlines and 83.6% for U.S.-based publicly traded target market competitors.
VLRS is most comparable to US-based Spirit Airlines, but has a higher P/E multiple and a lower profit margin.
June '13 12 mos
Volaris Aviation Holding
June '13 12 mos
Volaris Aviation Holding
Spirit Airlines (SAVE)
JetBlue Airways (JBLU)
Southwest Airlines (LUV)
Allegiant Travel (ALGT)
Even though shareholders are selling 40% of the IPO and the P/E multiple is on the high side, the rating on VLRS is neutral to positive because it is profitable, appears to have top line revenue momentum in its targeted market and should benefit from getting more aircraft on line.
To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above:
VLRS is a "ultra-low-cost carrier" (ULCC) based in Mexico. VLRS targets passengers who are visiting friends & relatives (VFR), cost-conscious business people and leisure travelers in Mexico and to select destinations in the United States.
The unbundled pricing strategy allows VLSR to provide low base fares and enables passengers to select and pay for a range of optional products and services for additional fees.
VLRS began operations in 2006, and has increased routes from five to 80 and grew its cost-efficient Airbus A320 family aircraft from four to 43.
VLRS currently operates up to 235 daily flight segments on routes that connect 30 cities in Mexico and 10 cities in the United States. VLRS has substantial market presence in the top five airports in Mexico, based on number of passengers, comprising Cancún, Guadalajara, Mexico City, Monterrey and Tijuana.
The ten cities that VLRS serves in the United States are home to some of the most populous Mexican communities in the United States based on data from the Pew Hispanic Research Center.
VLRS is the lowest cost carrier among the other Latin American publicly traded airlines.
"CASM" or "unit costs" means total operating expenses, net divided by ASMs. "Available seat miles" or "ASMs" means the number of seats available for passengers multiplied by the number of miles the seats are flown
In 2012, VLRS's CASM U.S.$0.094, compared to an average CASM of U.S.$0.140 for the other Latin American publicly traded airlines.
VLRS also has lower costs than U.S.-based publicly traded target market competitors, including Alaska Air, American, Delta and United, which had an average CASM of U.S.$0.145 in 2012. With VLRS's ULCC business model, VLRS has grown significantly while maintaining a low CASM over the last five years.
VLRS believes it can further lower its CASM by deploying additional Airbus A320 aircraft and leveraging the existing infrastructure to drive economies of scale. VLRS believes that further reductions to its CASM will allow us VLRS to continue to lower base fares, stimulate market demand and increase non-ticket revenue opportunities.
Fares & load factors
VLRS's base fares are priced to compete with long-distance bus fares in Mexico. During 2012, the average base fare was U.S.$106 and VLRS regularly offers promotional base fares of U.S.$38 or less.
Since May 2012, VLRS has unbundled certain components of its air travel service as part of a strategy to enable passengers to select and pay for the products and services they want to use. This unbundling strategy has allowed VLRS to significantly grow non-ticket and total revenue.
VLRS plans to continue to use low base fares to stimulate additional passenger demand, shift bus passengers to air travel and increase its load factor.
In 2012, the average load factor was 82.9%, compared to an average load factor of 76.0% for the other Latin American publicly traded airlines and 83.6% for U.S.-based publicly traded target market competitors. Higher load factors help VLRS generate additional non-ticket and total revenue, which in turn, allow VLRS to further lower base fares and stimulate new demand.
5% shareholders pre-IPO
Blue Sky Investments, S.à. r.l., 25.2%
Discovery Air and other funds managed by Discovery Americas, 29%
Funds managed by Indigo, 24.3%
Discovery Air Investments, L.P., HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, División Fiduciaria, Fideicomiso Irrevocable de Emisión de Certificados Bursátiles F/262374, Blue Sky Investments, S.à r.l., Emilio Diez Barroso Azcárraga, Ignacio Guerra Pellegaud, María Eugenia Braña Escalera, Indigo Mexico Coöperatief U.A., Long Bar LatAm LLC, Banco Invex, S.A., Institución de Banca Múltiple, Invex Grupo Financiero, Fiduciario, Fideicomiso de Administración y Custodia denominado como "DAIIMX/VOLARIS" e identificado bajo el número F/1405 and HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, División Fiduciaria, Fideicomiso Irrevocable de Administración número F/307750.
Use of proceeds
VLRS expect to net $211 million from its IPO from selling 60% of the total IPO. Selling shareholders expect to sell 40% of the total IPO.
$30 million is allocated to repay debt. The remaining net proceeds will be used for general corporate purposes, including pre-delivery payments of aircraft.
VLRS is offering 129,757,198 CPOs in the form of ADSs (Amerian Depositary Shares), and the selling shareholders are offering 86,588,956 CPOs in the form of ADSs through the international underwriters in the United States and countries other than Mexico.
Concurrently with the international offering, VLRS is offering 43,319,725 Series A shares and the selling shareholders are offering 28,795,659 Series A shares in Mexico in a public offering approved by the CNBV conducted by the lead Mexican underwriters through a Spanish-language Mexican prospectus.
Each CPO represents a financial interest in one Series A share. The CPO trustee, Nacional Financiera, Sociedad Nacional de Crédito, Institución de Banca de Desarrollo, or NAFIN, will issue the CPOs as trustee under the CPO trust agreement and pursuant to a CPO trust deed.
Under VLRS's by-laws and Mexican law, non-Mexican investors cannot directly hold Series A shares. However, Mexican law permits non-Mexican investors to hold shares indirectly through neutral shares or securities. Because the CPO trust qualifies as a neutral investment trust under the Mexican Foreign Investment Law, non-Mexican investors can beneficially own equity. However, all holders of CPOs will not have any rights to vote or to direct the CPO trustee to vote the Series A shares underlying the CPOs.
CPOs are negotiable instruments which must be issued by a financial institution acting as trustee under Mexican law. Series A shares will underlie each CPO. The CPO trust has a maximum term of 50 years. After such period has expired, the CPO trust can either be extended or terminated in accordance with its terms, or substituted by a new CPO trust. If the CPO trust is terminated, holders of CPOs that are non-Mexican investors will not be entitled to hold the underlying Series A shares directly and will be required to cause their interest in such shares to be sold to Mexican individuals or corporations.
Each ADS represents ten CPOs.
Disclaimer: This VLRS IPO report is based on a reading and analysis of VLRS's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.