Putting an end to all the speculations, AMR Corporation (PINK:AAMRQ), the parent of American Airlines, and US Airways Group, Inc. (NYSE:LCC) official announced a merger to create the world's largest airline carrier. Market value of the combined company would be about $11 billion. The companies aim to complete the transaction by the end of the third quarter.
The new company shave off US Airways but will retain the American Airlines name. The company expects $1 billion in annual cost savings by 2015. The combined firms will have its headquarters in Fort Worth, Texas. US Airways Group, Inc. (NYSE:LCC) CEO Doug Parker will lead the new company, whereas American Airlines chief executive Tom Horton will be a non-executive chairman of the combined airline.
Parker has been pushing for the merger for years. Both the executives said in a joint interview that they will smoothly fit into their new roles. Parker and Horton have been friends for over 25 years. Parker and Horton, both aged 51, started their carriers in the finance department of American Airlines in mid-1980s. Though Doug Parker left the company later to work with other carriers, they stayed in touch ever since.
The deal has to receive anti-trust clearance from the Department of Justice and other regulators, and should be approved by the bankruptcy judge overseeing AMR's restructuring plans.
AMR Corporation (PINK:AAMRQ) that owns American Airlines filed for bankruptcy in November 2011. When Parker approached Horton to cement what could be the last big airline consolidation, Horton and American Airlines were adamant that they would emerge from the bankruptcy first. Only then American Airlines would consider a merger.
Despite all the resistance, Parker paved the way for the merger by winning over the three major labor unions of American Airlines. He also made the AMR creditors realize that the combination would make more sense than American's stand-alone bankruptcy exit plan. The U.S. Airways had proposed a plan last April that offered AMR creditors 49.9 percent of the combined carrier. Under the deal announced today, U.S. Airways shareholders will get 28 percent in the new company while AMR creditors will own 72 percent.
If approved, the deal will be the third mega-merger in American airline industry since 2008. Northwest and Delta Air Lines, Inc. (NYSE:DAL) were merged in 2008, while United and Continental merger took place in 2010 to form United Continental Holdings Inc (NYSE:UAL). After the American Airlines-U.S. Airways Group, Inc. (NYSE:LCC) merger, there will be only three legacy carriers in the United States.
Sterne Agee maintains buy rating on the U.S. Airways Group, Inc. (NYSE:LCC) that would form 28 percent of the new company. Analysts believe that the shares of U.S. Airways are worth $23-25. By applying a discount on uncertainty with Bankruptcy Court and the Department of Justice, US Airways Group shares would still be valued at $19-21.
Jeffrey Kauffman, senior analyst at Sterne Agee said that U.S. Airways had 205.1 million shares by the end of December 2012. So, the combined total shares will be about 732 million.
Even if we assume 5 percent annual growth in combined revenues, that will be $43 billion in 2015. At 28 percent and 72 percent ownership ratio between U.S. Airways shareholders and AMR creditors, the EPS from the combined company would be $3.23. At 7x of 2015 EPS, shares will be fairly valued at $23. After discounting 20 percent for the risk with Bankruptcy Court, Department of Justice and DOT rulings, analysts arrived at $19-21 in near-term.
US Airways shares were down 5.87 percent to $13.80 in New York trading.