AMR Corporation – Market Cap (as of 01/03/13): $ 0.84 bn;
US Airways Group Inc. – Market Cap (as of 01/03/13): $2.19 bn
Deal type: 100% Acquisition
On February 14, AMR Corporation, the parent company of American Airlines, and US Airways Group Inc., announced that the boards of directors of both companies have unanimously approved a merger agreement, valuing AMR’s assets at $6.12 bn.
The framework to understand the deal is the insolvency and subsequent filing for Chapter 11 Bankruptcy Protection of AMR Corporation in November 2011: under the US law AMR has the right to reorganize its business while guaranteeing the creditors’ interests.
The deal has been considered by both corporate buyers (with a significant interest from Delta Airlines) and private equity funds, like TPG Partners, but soon it became clear that US Airways had a higher chance of acquiring the company.
Under the terms of the recently announced agreement, the surviving entity will be US Airways and the merger will be entirely financed with shares in a reverse takeover structure. The airline will issue 417.71 million shares of an estimated worth of $6.12 billion (based on the closing share price of $14.66 on February 13, the last trading day prior to the announcement) to acquire all the operations of AMR.
Given US Airways’ 162.44 million shares outstanding, its current shareholders will end up holding 28% of the combined airline. The remaining 72% will be owned by AMR’s debtholders that filed for relief under Chapter 11, American Airlines’ labor unions, and current AMR employees and shareholders. The combined company’s equity value is estimated to be approximately $11 billion.
The transaction is still subject to approval from the US Bankruptcy Court for the Southern District of New York, regulatory approvals, US Airways shareholder approval, and other customary closing conditions. For what concerns the regulatory approval, in previous mergers federal regulators have not focused on the overall size of the combined airline but instead looked at whether a merger would decrease competition in individual cities.
The transaction is expected to close during the third quarter of 2013.
The merger is expected to generate more than $1 billion in annual net synergies in 2015, including $900 million in network revenue synergies, resulting predominantly from increased passenger traffic, taking advantage of the combined carrier’s improved schedule and connectivity and an improved mix of high-yield businesses. Estimated cost synergies of approximately $150 million are net of the impact of the new labor combined contracts at American Airlines and US Airways.
The companies expect one-time transition costs for the merger of approximately $1.20 billion, spread over the next three years. A big issue for the merged company will be also the integration of the companies’ operations and technology systems (including the reservation websites, the check-in, the inventory systems, the schedule planning, the aircraft maintenance, the revenue accounting and management). This could be very complex, take several years and cost millions of dollars.
In the recent years, the airline industry has been in a continuous process of consolidation. M&A has contributed to increase operating efficiency among operators and to create healthier and more profitable airlines that are able to invest in new planes and products including Wi-Fi, individual entertainment screens and more comfortable seats for business passengers.
For American Airlines, which has a fleet of 605 airplanes, this merger is an opportunity to strengthen its presence in the Northeast and give it a bigger network to attract business travelers and corporate accounts. The combined airline will have more than 100 million frequent fliers and would be able to compete against United Airlines and Delta Air Lines, which have recently grown through mergers becoming the biggest domestic carriers. The merger looks also extremely complementary since the two airlines have only 12 routes overlapping out of a combined 900 routes that the two airlines serve together. In addition, as a combined company the two airlines would be able to operate in more cities since American flies to 130 cities that US Airways does not fly, and, US Airways flies to 62.
Rothschild is serving as financial advisor to American Airlines while Barclays and Millstein & Co. to US Airways. Finally Moelis & Company and Mesirow Financial are serving as financial advisors to the Unsecured Creditors Committee.