It’s supposed to be a dubious merger at best, but investors rewarded the idea of America West Airlines joining financially troubled US Airways by sending the Tempebased carrier’s shares dramatically higher since the deal was announced.
Even with an analyst downgrade, continued high oil prices and Wall Street’s neutral feeling on the combined carrier, shares of America West are up nearly 30 percent since the merger was announced a month ago.
Airline consultant Bob Mann, of R.W. Mann & Co., said several factors appear to be contributing to America West’s favorable stock outlook, including investors being more comfortable with the deal.
"As we see the company release more and more information (through regulatory filings), a lot more color . . . is being applied to what otherwise looked like a black and white merger deal," said Mann, who is advising America West’s pilots during the merger. "That assuages some of the concerns."
Also, the carrier continues to see new investors, giving the stock some momentum, Mann said. "It’s obviously a very compelling case that’s been presented to those investors," he said.
Shares of America West Holdings Corp., the carrier’s parent, fell 6 cents Monday, or about 1 percent, to close $6.18 on the New York Stock Exchange. Shares were $4.81 when the merger was announced May 19, and they reached a post-announcement high of $6.45 June 3.
By contrast, the stock price for US Airways, which has filed for bankruptcy protection, slid by nearly 30 percent from the time the merger was announced.
When the deal was announced, America West said $350 million of new equity was to be provided by four investment groups, and the company was going to raise $150 million through a planned rights offering. Since then, Wellington Management has committed $150 million more to purchase the merged
company’s common stock for $16.50 a share.
Mann said the figure Wellington paid makes investors more bullish. "That does lend some support to just the AWA equity as it stands today," he said.
America West chairman and CEO Doug Parker has told Wall Street more investors lined up at the door but weren’t allowed in because those already part of the deal don’t want their stakes diluted.
With equity financing estimated at $650 million, Parker expects to make a profit even at $50 a barrel for oil. The combined carrier is projected to have $10 billion in annual revenue.
But not everyone is high on America West stock. Some suggest US Airways may be an albatross on the neck of the the Tempe-based carrier. And they worry the good performance is a sign to back off or stay on the sidelines.
The day after the merger was announced, Goldman Sacks downgraded America West shares from "outperform" to "in-line."
Prudential Equity Group analyst Bob McAdoo gave the airline a "neutral" rating earlier this month when he began watching the stock. He gave the stock an $8 a share price target.
McAdoo said in a research report general cost savings, targeted at $250 million to $300 million per year, are unlikely to be realized until 2006 or beyond. Revenue "synergies," targeted at $150 million to $200 million may never be achieved, he said.
"Even assuming a reduction of fuel costs to about $1.38 per gallon in 2006, the combined entity will still likely lose $207 million in 2006, or $2.24 per existing AWA share," McAdoo wrote. "Given potential post-merger losses and the recent AWA share price strength, we would encourage AWA holders to move into shares of airlines that will benefit from the likely America West restructuring of UAIRQ’s (US Airways) routes. Our favorites are AirTran Holdings and Southwest Airlines"
Analysts at Fulcrum Global Partners also have the stock rated "neutral."
"While we are encouraged by the transaction’s potential success, we will take a ‘wait and see’ approach given the dismal track record of airline mergers, they wrote. "Our 12-month target price for America West is $5."
Fulcrum suggested some hurdles remain.
"Labor integration needs to be completed, which has proved daunting in past mergers," analysts wrote. "Bankruptcy court approval, as well as (government) approval is necessary."
The merger is expected to be finalized by fall.