Has Alaska Air Paid A Fair Price For Acquiring Virgin America?

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Last month, Alaska Air (NYSE:ALK) announced its plans to acquire Virgin America (NASDAQ:VA) for $57 per share in cash. Apart from paying cash, the Seattle-based airline will assume Virgin America’s long-term debt and capitalized aircraft operating leases worth $1.4 billion, making the aggregate transaction value $4 billion. The primary objective of the deal is to expand Alaska Air’s footprint in California and to strengthen its competitiveness against the top four US airlines. In addition, the two airlines are known for providing an exceptional in-flight experience and operational consistency, and have been recognized with a number of industry accolades. Hence, a combination of the two will create a low-fare carrier offering a premium product.

The combined entity is expected to generate annual revenue of more than $7 billion. Alaska Air anticipates revenue and cost synergies of roughly $225 million, to be realized at the time of full integration. Also, the airline forecasts one-time merger related costs in the range of $300-$350 million. Based on the guidance provided by the companies and assuming weighted average cost of capital (WACC) and tax rate to be 9% and 35% respectively, below we try to assess whether Alaska Air has fairly valued Virgin America and paid a justified premium to its shareholders.

ALK-Q&A-merger

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As estimated in the table above, the premium paid by Alaska Air for acquiring Virgin America is a little more than $1.1 billion. Interestingly, the present value of the synergies derived from the deal also amount to $1.1 billion. Thus, we believe that Alaska Air has paid a fair price for acquiring Virgin America.

Have more questions about Alaska Air (NYSE:ALK)? See the following links:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Alaska Air Group

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