Airline Financial Aquisition Essay

2726 words - 11 pages

TABLE OF CONTENTS
Delta Airlines……………………………………………………………………………………...3
Target Cost………………………………………………………………………………………..3
Cash Available……………………………………………………………………………............3
Debt to Equity…………………………………………………………………………………....3
Equity Available………………………………………………………………………………….4
Role of Investment Bankers……………………………………………………………………...4
Buyers of Stocks/Debts……………………………………...…………………….…………......5
Market for Debt………………….……………..………………………………………………...5
Cost of Financing for Acquisition………………….………………..…………………………..5
Background to Investment Bankers and Services……....…………………………………….....6
Cost of Debt and Equity Calculations…………………………………………………………..7
Analysis of ...view middle of the document...

had (Yahoo! Finance, 2012):

Delta Air Lines, Inc. keeps a high amount of excess cash due to the volatility of the industry and the fluctuating prices of fuel. Cash for operations includes all expenses for keeping the company running and after interest on company debt has been paid out.
Debt to Equity
As of June 30, 2012 Delta Air Lines, Inc. had (Yahoo! Finance, 2012):

Debt to Equity Ratio for Delta Air Lines, Inc. and other airlines in the industry:

Delta Air Lines, Inc. filed for Chapter 11 Bankruptcy in 2011, which explains their negative stockholder equity. They had many losses and are working towards digging out of this negative equity. They do not match with others in their industry, except for the fact that they have high debts. Industries that require intensive capital investments normally have above-average debt-equity ratios, as companies must use borrowing to supplement their own equity in sustaining a larger scale of operations. These are there closest domestic competitors based on the number of passenger miles.
Equity Available
As of June 30, 2012 Delta Air Lines, Inc. had 845 Million shares outstanding with 1.5 billion shares authorized (Yahoo! Finance, 2012). That makes 655 million shares available to be issued. On August 15, 2012 shares closed at $9.26 per share. At this price Delta would have to issue 176,780,994 shares in order to finance their purchase of US Airways, Inc.
Role of the Investment Banker
During the course of the acquisition process of US Airways, the investment banker will obtain private information about US Airways cash flows, financial resources, and other exposures that can be useful in estimating the future prospects of a proposed merger. One of the investment banker's most important jobs is pricing US Airways. There are a number of ways to evaluate fair market value, but the seller must guard against unrealistic expectations. One method to establish the market value is to compare the asking price with the market value of similar airlines that have recently been sold, such as Southwest who bought out AirTran in 2010 for $7.69 per share, which included $3.75 in cash and 0.321 per share worth of Southwest stock (Blogs.barrons.com, 2010).

Buyer of stock/debt
Delta will purchase 100% of the outstanding common stock of US Airways; therefore, the outstanding common stock of US Airways is not dissolved. Instead, US Airways will retain the existing legal structure. The operations of US Airways will be absorbed within the operations of the Delta. For financial reporting purposes, Delta will report the consolidated result of its individual operations and the operations of its "consolidated subsidiaries."
Market for Debt
Delta will not have a large market for debt according to their Financial Condition and Liquidity section of their 2011 10-K. Their total debt and capital leases, including current maturities, was $13.8 billion, which was a $1.5 billion reduction from the previous year;...

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