Interesting SWA

[radarlove]

While watching Parker's attempt to purchase Delta, a bankrupt company currently losing money, I was struck by a simularity. I went and checked, and sure enough:

USAir is offering $12 billion dollars to purchase Delta

Southwest Airlines current market capitalization is currently only a little over $12 billion.

In effect, Parker is saying that Delta is worth as much as all of Southwest Airlines, and Delta is saying that they're actually worth more than LUV, while still in bankruptcy court. Since USAir has lined up the debt to purchase Delta, apparently at least the debt market agrees.

LUV has had a flat stock price for this entire century so far. I noticed that today they made a change allowing only a simple majority to change their bylaws, instead of a supermajority. Silly to speculate, but why would SWA make it easier to change their corporate bylaws?

Weird things are underfoot.

 

[Murphy]

With International routes, Delta should be worth more than SWA.

 

[Bake]

Radar, first of all bithc you need to get your story straight. US Air has offered 10.2 billion for DAL not 12. Second SWA Market cap is 12.6 billion so you are 2.4 billion dollars wrong on your assumption. You've been in the military too damn long. Your conspiracy theory does not quite hold water at this time. Keep dreaming epiwssa. ?watch out for the black helicopters, they might see you?

ps. call me tomorrow. got your msg but was busy bumping when you called.

Bake

 

[radarlove]

Radar, first of all bithc you need to get your story straight. US Air has offered 10.2 billion for DAL not 12. Second SWA Market cap is 12.6 billion so you are 2.4 billion dollars wrong on your assumption.

I read "Offer worth between eight and twelve billion", you call it 10.2.

Ok, either way, that is pretty close to what SWA could be purchased outright for.

I am not for an instant posing the thought that USAir/Delta/AWA would ever purchase or merge with SWA, just the fact that the simple dollar amounts being thrown around put SWA right into the gunsights of others. Texas Pacific Group? Carlyle Group?

Keep in mind that Parker may not have made his last offer, he upped it once, there might be more powder left. It is conceivable that the combined USAir/AWA/Delta airline be valued at double SWA.

And SWA is making a profit (small) and growing (unlike its profits).

 

[HighSpeed]

Apples and Oranges....

Market Cap doesn't equal value - Its only OUTSTANDING shares............

 

[XR650R]

Remember, assuming SWA does not want to merge(or be acquired), you'd have to offer the board a price per share that they couldn't refuse- maybe possibly double the current price. Most analysts have a $21-$24 target price on LUV in the next 12-16 months. That would put the price up in the $24b range. Not impossible but unlikely. Also, as I remember, there is a "poison pill" clause in the corporate charter that would make it nearly impossible to acquire LUV in a hostile take-over bid. SWA also has the cash on hand to bite back- hard if necessary.

 

[Bake]

No Radar, the offer was 10.2B. Delta says that if it emerges from BK as a stand alone it would be valued between 8 and 12. Don't make me slap you.

Bake

 

[shearedshaft]

Remember, assuming SWA does not want to merge(or be acquired), you'd have to offer the board a price per share that they couldn't refuse- maybe possibly double the current price. Most analysts have a $21-$24 target price on LUV in the next 12-16 months. That would put the price up in the $24b range. Not impossible but unlikely. Also, as I remember, there is a "poison pill" clause in the corporate charter that would make it nearly impossible to acquire LUV in a hostile take-over bid. SWA also has the cash on hand to bite back- hard if necessary.

SWA does not have a poison pill. Shareholder activists got that off the books years ago.

Acquisition premiums are usually only around 20%, so LUV could be purchased outright for $14-$15 billion. "Market Cap" is what the market values the company, of course it's outstanding shares--that's what would have to be purchased, duh. Authorized shares are meaningless, unless they're tied into a poison pill, which here they're not.

SWA has $2 billion cash on hand--making it even more of a juicy target, not less of one. How does it "bite back"?

 

[Schiphol]

SWA does not have a poison pill. Shareholder activists got that off the books years ago.

Acquisition premiums are usually only around 20%, so LUV could be purchased outright for $14-$15 billion. "Market Cap" is what the market values the company, of course it's outstanding shares--that's what would have to be purchased, duh. Authorized shares are meaningless, unless they're tied into a poison pill, which here they're not.

SWA has $2 billion cash on hand--making it even more of a juicy target, not less of one. How does it "bite back"?

Agreed, in theory....but what everyone is really talking about here is the art (cause it ain't a science I assure you) of valuation in M&A.

Strictly speaking, market cap does take into account all future cash flows, expansion plans and other premiums that any company might encounter in what the market considers to be a 'reasonable' time horizon. That is what is priced into the shares by the market.

Now authorized shares are not necessarily meaningless, depending on what type and how many outstanding options are out there. While no (or very few) boards will ever approve issuing additional shares in order to counter a bum rush on options exercising...its something that has to be considered.

Finally, I think someone may have mentioned this already...but comparing SWA to Delta is like comparing apples to 18th century Dutch philosophers.

Delta has bondholders...these bondholders are looking for a premium on the bonds they hold. As long as they see an acceptable premium on those bonds, they will be happy. As such, that is obviously a one-time pay out.

SWA shareholder (and large shareholders) would be less likely to sell anywhere close to the premium that a Delta bondholder would accept. Primarily because SWA stock + any future dividends payouts would be worth far more than say the 20-40% premium a Delta bondholder would be willing to take.

Again, M&A valuation is an art...and each deal will look different, but those are some of the basics.

I don't think anyone on here has said anything that isn't right in some way shape of form.

 

[radar_contact]

No Radar, the offer was 10.2B. Delta says that if it emerges from BK as a stand alone it would be valued between 8 and 12. Don't make me slap you.

Bake

You got the wrong Radar!! :blush:

 

[YourPilotFriend]

2007 is the year of SWA. It has to deliver at least $750 million in profit for the year. Its earnings per share are down some 50%, as it heads into the most competitive year it has ever faced in its history. No way are investors going to pump the kind of money into SW that will give the share price of over $20. The question is can it hold $16.

 

[radarlove]

Delta has bondholders...these bondholders are looking for a premium on the bonds they hold. As long as they see an acceptable premium on those bonds, they will be happy. As such, that is obviously a one-time pay out.

SWA shareholder (and large shareholders) would be less likely to sell anywhere close to the premium that a Delta bondholder would accept. Primarily because SWA stock + any future dividends payouts would be worth far more than say the 20-40% premium a Delta bondholder would be willing to take.

Sounds good, but I don't think you've done your math. A premium is a premium, are you arguing that if offered the chance to sell shares to a third party for $22.00 or keep them at a value of $15.80, the LUV shareholders would decide to keep them? Since most shares are held by financial institutions, that would be a breach of their fiduciary duty.

The market cap of SWA is low, earnings growth is zero, but their cash is high and there is frenzied activity in the industry in terms of consolodation.

To me this leads to an interesting situation.

 

[FlyBoeingJets]

2007 is the year of SWA. It has to deliver at least $750 million in profit for the year. Its earnings per share are down some 50%, as it heads into the most competitive year it has ever faced in its history.

Without $750 in profit, what is going to happen?

I presume you mean they will be heading into BK by 2009 as you have previously said.

2007 will be another good year for SWA...and everyone else. Everyone should be making money, which traditionally makes investors leave SWA stock in favor of the more "cyclical" airline stocks (Like in 2006).

No. Low stock price does not mean impending BK. Takeover? Maybe. I'm not too smart on that type of thing.

The market is telling us JetBlue is headed out of the woods in late '07 or '08.

SWA stock may rise as profits stall at the legacies. IMHO, investors are being too optimistic on legacy fortunes and pessimistic on SWA. Traditionally that is always the case. On regional routes not serve by SWA the ticket prices are 50-70% higher than SWA flight of comparable length. Why can't the legacies make money with that profit center?

Delta is making a killing on flights in and out of CVG (5-8 times a SWA ticket) and they are STILL losing cash. Incredible!!

 

[Schiphol]

That was my point. There is no math.
A bond is a fixed income. While the valuation of those bonds on the market can increase or decrease, the price premium for said bonds is typically fixed.

A share is a speculative holding to a greater degree than a bond. Typically shares must be acquired at a much higher premium above market than bonds.

I'm not arguing for or against opinions here. I'm just saying that while a bondholder might be satisfied w/ a 7-10% return, a large SWA shareholder would expect something like 12-20% return at the very least.

Like I said, you have to keep in mind that Div's are paid on stock and not on bonds.

Also, the risk profile for each is far different.

With DAL you are holding bonds for a company in reorg. With SWA you are holding partial ownership of a company that has yet to post a loss. The risk scale tips towards the DAL bonds.

Simply said...Easier to buy DAL than SWA.

But in the final analysis...nobody knows. Not even the people trying to execute these deals yet.

I would bet on this though....

Consolidation will happen in the next two years...and capacity will slowly start to increase to meet demand.

That is all.