What does that mean for AAMRQ investors?
The new airline's share price will be based off of the share price of US Airways at the time of the merger. Once the merger gets finalized, US Airways shareholders will get 28% of the new company and the rest of the company will be divided up between shareholders and debt holders of American Airlines.
Currently US Airways trades for $23 with a market value of $4.6 billion. If the merger happened today, the new airline would be worth $12.88 billion. This means that there will be $8.28 billion worth of equity to be divided between shareholders and debt holders of American Airlines. I've seen many different calculations valuing American Airlines based on the current value of US Airways and they range widely from $10 per share to $20 per share. For the time being, we know one thing for sure; the downside of American Airlines is far more limited than it was a week ago. If the merger was canceled, the shares of American Airlines could be worth as little as $0, and now they are worth a lot more than that, which should be a relief to the shareholders of the company.
Then again, this is a conservative estimate because the current share price of US Airways actually makes the combined airline undervalued. The new airline is expected to generate $40 billion in revenues. If we apply the current profit margins of US Airways to this value, we get a gross profit of $22.44 billion, an operating profit of $4.44 billion and a net income of $2.5 billion. This excludes the $1 billion of annual net synergies the new airline expects to have because of its massive size. If the new airline generates about $3 billion in net earnings and we assign it the P/E ratio of Delta Airlines (about 12), it would be valued at $36 billion, which is triple the value it would be today based off of the current value of US Airways. According to the current value of US Airways, the new airline will have a forward P/E of 3, which is ridiculously low.
Since the debt holders of American Airlines will be shareholders of the new company, the debt of the new company will be fairly limited. The new company should be cash rich since American Airlines has about $6 billion and US Airways has close to $4 billion of cash and short term holdings. This will allow these companies to buy new planes and upgrade their fleets to meet the needs of the next decade. Having newer planes should also help the airline companies with fuel costs since the newer planes tend to have better fuel economies. The companies could also use their cash in other ways, such as rewarding the patient investors with a buyback or dividends (especially if the new company gets valued as cheaply as US Airways is today).
As more details emerge about the merger, we will be able to calculate value of the new company more efficiently. At the moment, the settlement is an exciting development for the shareholders of both US Airways and American Airlines.
