On Monday Alaska Air reached an agreement to acquire Virgin America Inc (NASDAQ:VA), ending a bidding war with JetBlue Airways in the process. Alaska will pay $2.6 billion in total equity value for the acquisition of Virgin, valuing the company at $57 per share. Deutsche Bank notes: While the price paid for the equity implies ~20x our 2016 earnings forecast of $127 million for Virgin America or an EPS estimate of $2.85 vs. consensus of $3.56 – both of which fall within the 15x – 20x P/E range typical of profitable, growth-oriented, low cost carriers – we believe Alaska was most interested in Virgin’s real estate at major gate-constrained and slot-constrained airports. This includes seven to eight preferential use gates at both Los Angeles and San Francisco (plus access to several common-use gates), two gates at Dallas Love Field, as well as gates and slots at the three NY airports and Washington Reagan National.
Virgin America Inc
Sterne Agee CRT opines:
We upgrade Virgin America Inc. to a Neutral from Underperform after it announced it is being acquired by Buy-rated Alaska Air Group ($82.01 ALK) for $57 per share. VA provides ALK with an expanded California presence, a strong frequent flier base in Silicon Valley, and access to gates and slots in constrained airports, including Washington Reagan, JFK and LaGuardia. From a valuation perspective, VA’s acquisition price equates to roughly 7x estimated ’17 TEV/ EBITDAR, the high end of the 4x-7x historic range. ALK and VA expect the deal to be accretive within the first full year and $225 million in annual net synergies at full integration. It is expected to close by January 1, 2017 and a single operating certificate by 2018.
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Credit Suisse states:
Upgrading to Neutral and Raising TP: Following announcement of ALK’s acquisition of VA we raise our target price to $57 per share – the current announced deal price – and upgrade our rating to Neutral as we see little room for further upside from the announced deal price without other airline parties interested in pursuing a bidding war which we see as unlikely.
? No Changes to Estimates: Our 2016/2017/2018 EPS estimates of $3.90, $4.06, and $3.79 remain unchanged.
See the following visualizations which highlight relevant financial figures surrounding Alaska Air’s acquisition of Virgin America.
Alaska Air vs Virgin America 1-Year Returns
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Alaska Air Group Inc. (ALK) vs. S&P 500 Percent Change Over Time – 1 Year
Alaska Air Group Inc. (ALK) Stock Price – Current Day
Virgin America Inc. (VA) Stock Price