DAL - Wheels Up Experience Avoids Bankruptcy At The Price Of Massive Dilution: Sell

2023-08-15 18:40:32 ET

Summary

• Ailing private aviation services provider Wheels Up Experience avoids bankruptcy at the price of massive dilution for existing equity holders.
• Strategic partners Delta Air Lines, Certares Management, and Knighthead Capital to provide an aggregate $500 million in new credit facilities.
• On a fully-diluted basis, the proposed transaction has caused enterprise value to jump by more than 400% from Monday's close to approximately $1.5 billion despite ongoing deterioration in the business.
• Even with the support from the company's new strategic partners, it will likely take some time for prevailing business trends to reverse.
• Given deteriorating business trends, valuation concerns and the upcoming massive dilution for existing shareholders, investors should consider selling existing positions and moving on.

On Wednesday, ailing private aviation services provider Wheels Up Experience Inc. or "Wheels Up" ( UP ) managed to avoid a likely near-term bankruptcy filing by handing over 95% of the company's equity to new investors including strategic partner Delta Air Lines, Inc. ( DAL ) or "Delta" and affiliates of private equity firms Certares Management LLC ("Certares") and Knighthead Capital Management LLC (Knighthead) in exchange for $500 million in new credit facilities (emphasis added by author):

Delta Air Lines, Certares Management LLC, a leading investment specialist dedicated to the travel, tourism and hospitality sectors, and Knighthead Capital Management LLC, a deep value and turnaround investment firm, announced an expanded partnership with Wheels Up Experience Inc., a leading provider of on-demand private aviation, to accelerate the company’s business transformation.

Earlier this year, Wheels Up announced plans to scale and evolve its product offerings to deliver world-class private aviation service profitably. Funding provided by Delta, certain affiliates of Certares and Knighthead, and other partners is expected to provide the company the stability to execute on its strategic vision over the long term.

The partnership would combine the experience of Delta, the No. 1 premium airline and a longstanding Wheels Up partner, with the travel and tourism focus of Certares and turnaround and restructuring experience of Knighthead to boost Wheels Up as it evolves and elevates its customer experience, reliability and financial performance. It includes a non-binding agreement in principle for a $500 million facility to Wheels Up , which includes funds contributed by Delta and CK Opportunities Fund I, LP, (“CK Opportunities”) which is co-managed by affiliates of Certares and Knighthead. The facility would be comprised of a $400 million term loan and a $100 million liquidity facility from Delta, totaling $500 million to Wheels Up.

(...)

Under the non-binding agreement in principle announced today, Delta will provide Wheels Up with $150 million in new money term loans and a $100 million liquidity facility . An additional $150 million term loan will be provided under the facility by CK Opportunities . Furthermore, to date other investors have agreed in principle to join Delta and CK Opportunities to provide $50 million in term loans under the facility . The additional $50 million will be allocated to certain other investors as approved by Delta, Certares and Knighthead.

In connection with the transaction, Wheels Up will issue Class A common stock to the participating new money lenders such that they are expected to own approximately 95% of the Company following the transaction.

Please note that the company does not intend to seek approval by existing shareholders for the proposed transaction (emphasis added by author):

The company’s audit committee determined that the delay that would be caused in obtaining stockholder approval would jeopardize the company’s financial viability. Shares representing approximately 80% of the Company’s outstanding equity are expected to be issued without prior shareholder approval based on the Financial Distress Exception provided for in the Shareholder Approval Policy of the New York Stock Exchange.

Only the issuance of the remaining 15% would be subject to shareholders approving an amendment to Wheels Up’s certificate of incorporation but given the fact that the new shares expected to be issued under the NYSE's Financial Distress Exception will also be permitted to vote on the proposal, approval would be a mere formality.

While the proposed transaction remains subject to completing definitive documentation and other customary closing conditions, I firmly expect the deal to be consummated in the near future.

Unfortunately, Wheels Up continues to consume very sizeable amounts of cash with more than $400 million in cash used from operating activities in H1/2023 alone.

At the end of Q2, remaining liquidity was down to $151.8 million. Applying the recent rate of cash usage, the company would be running out of funds by early September at the latest point.

But even a substantial improvement in cash usage would have been unlikely to save the company from violating liquidity covenants governing the company's existing $251.5 million in 12% Equipment Notes in the current quarter.

Given this issue, Wheels Up apparently didn't have much of a choice as demanding better terms for existing equity holders would have likely caused Delta, Centares and Knighthead to withdraw their proposal and the resulting requirement to file for bankruptcy.

Despite current equity holders facing massive dilution, shares initially rallied by almost 50% before giving back most of the gains in afternoon trading.

In fact, the proposed transaction has resulted in the company's fully-diluted market capitalization of $750 million reaching a new 52-week high despite an ongoing decrease in active members and users.

Even with the support from its new strategic partners, it will likely take some time for prevailing business trends to reverse.

Moreover, with the company's new majority owners providing $500 million in debt facilities, they would likely be able to retain control of Wheels Up in a potential bankruptcy down the road by rolling their loans into a new super-senior debtor-in-possession ("DIP-") financing and submitting a credit bid in a court-supervised auction pursuant to Section 363 of the U.S. Bankruptcy Code.

On a transaction-adjusted basis, Wheels Up's enterprise value now calculates to a whopping $1.5 billion despite the recent deterioration in key customer metrics.

Bottom Line

While Wheels Up Experience Inc. is likely to avoid bankruptcy for now, reversing the deteriorating trends in the company's business won't be an easy task even when considering the support from its new majority owners.

Effectively, the transaction will result in Delta Airlines regaining control of its private aviation unit which was merged into Wheels Up in early 2020 in return for a minority stake in the company.

The proposed transaction resulted in enterprise value to jump by more than 400% from Monday's close to approximately $1.5 billion.

Given the deteriorating trends in the business, valuation concerns and the upcoming, massive dilution for existing shareholders, investors should consider selling existing positions and moving on.

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