JBLU - Hawaiian Holdings: Take The Cash And Run For Now

2023-12-04 17:51:00 ET

Summary

• Alaska Air Group, Inc. agrees to buy Hawaiian Holdings, Inc. in a deal to merge two airlines focused on West Coast travel.
• The deal values Hawaiian Airlines at $1.0 billion with an additional $0.9 billion in net debt for an EV a fraction of the price of traditional airline multiples.
• Hawaiian Holdings' stock faces limited upside over the next 18 months, with regulatory risk likely providing a better entry point in the future.

Over the weekend, Alaska Air Group, Inc. ( ALK ) agreed to buy Hawaiian Holdings, Inc. ( HA ) in a deal to merge 2 airlines focused on West Coast travel. The deal announcement is interesting considering the ongoing trial for another domestic airline merger with the DoJ suing to block the deal. My investment thesis is Bearish on Hawaiian Airlines after the big rally knowing regulatory risk is likely to keep the stock under pressure for up to 18 months.

Big Cash Premium

Alaska Air agreed to buy Hawaiian Airlines for $18 per share in cash. The deal values the equity at only $1.0 billion with an additional $0.9 billion in net debt.

Hawaiian Airlines had crashed to only $4 in the last month after trading above this buyout price back in early 2022. As with most airlines, the stocks recovered following the Covid shutdowns, but weak results in the last few quarters sent the stocks cratering again.

Why the market focuses on the big premium, Alaska Air actually makes the case for paying vastly more for Hawaiian Airlines based on the values assigned the 5 prior airline deals. The typical airline deal is done with a 1.7x EV/LTM revenue multiple, while this deal was only down at 0.7x LTM revenues.

Hawaiian Airlines is forecast to generate $2.7 billion in 2023 revenues and $3.0 billion in 2024. The airline has net debt of $0.9 billion and 1.7x revenues places the traditional airline deal value at closer to $4.6 billion. The stock would trade much closer to an incredible $67 under such a valuation considering how the debt portion of the EV skews the deal value at these lower prices.

With the stock trading above $14, an investor will only get up to $4 in additional cash by waiting for the deal to close. The total return is less than 30% for an annualized return in the 20% range factoring in an 18 month timeline, but with high risk and odds the stock trades much lower during the process.

Regulatory Issues

Alaska Air suggests no regulatory issues will exist in closing the Hawaiian Airlines deal. Unfortunately though, Spirit Airlines ( SAVE ) currently trades at only $15.50, while the current merger with JetBlue Airways ( JBLU ) offers a cash deal price of ~$30 now after upfront payments and monthly ticking fees. The closing arguments on the case occur on Tuesday, December 5, with a potential close in weeks, not months.

United Airlines ( UAL ) CEO Scott Kirby only gave the deal a 60% approval chance, but this merger deal would suggest much higher odds. Alaska Air is highly unlikely to get a deal approved for Hawaiian Airlines with the Spirit Airlines deal blocked, and most importantly Hawaiian Airlines stock would plunge in such a scenario.

The new Alaska Air would control the Seattle and Hawaii markets. Though neither hub is a top 7 market, the airline would have over 50% of seat share in those markets, at least requiring some sort of remedy.

The airline claims less than 3% overlap in 12 routes, though Alaska Air and Hawaiian are natural competitors for future seat share in these key West Coast markets. Hawaiian Airlines just reported a massive Q3'23 loss of $1.06 per share due in part to the August wildfires on Maui and higher fuel costs.

The combined airline will have ~$13 billion in revenues with only $235 million in synergies. Due to the plan to maintain both airline brands, the majority of the synergies are revenue opportunities focused on expanding international connections and improving the co-brand card economics with the addition of 2.2 million active loyalty members from Hawaiian Airlines.

The combined airline only forecasts $20 million in cost savings, which could help the regulator view. Ultimately, though, the stock isn't likely to trade much higher under the current regulatory environment, and all of the other major airlines are either involved in a deal or unable to bid on Hawaiian Airlines, suggesting other bidders don't exist for a higher price.

Takeaway

The key investor takeaway is that the Alaska Air deal to acquire Hawaiian Airlines was shocking considering the ongoing trial for the JetBlue/Spirit Airlines deal. Hawaiian Airlines soaring to $14 leaves limited upside for the stock in the short term due to all of the risks for a merger closing. Hawaiian Holdings, Inc. investors are best to cash in here and wait for a better price in the future when regulatory risks likely hit the stock similar to what happened with Spirit collapsing below $8 this year.

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