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 (OTC:AAMRQ) 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.
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.
Alaska Air Group 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.
Additional operational bonus: American already has a partnership with Alaska Air. Plus, Alaska Air 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.