Alaska Air Wins Bidding War for Virgin America
April 04 2016 - 6:00AM
Dow Jones News
Alaska Air Group Inc. said Monday morning that it had reached a
deal to buy Virgin America Inc., winning a frenzied bidding war
with rival JetBlue Airways Corp.
The parent company of Alaska Airlines said it would pay $57 a
share for Virgin, a 47% premium to Friday's closing price,
representing a total equity value of $2.6 billion. The Wall Street
Journal had reported Sundaythat Alaska won the bidding contest for
Virgin, whose shares have risen lately on takeover speculation.
Bidding between Alaska and JetBlue was feverish, a person
familiar with the matter had told the Journal, with the price
continuing to rise. Alaska prevailed in part because of its clean
balance sheet, which will allow it to more easily borrow funds for
the acquisition, the person said.
A person familiar with the jousting said it was "a fierce back
and forth between the two sides, with multiple bids for a number of
days." But ultimately, JetBlue "put the pencil down" because the
price had gotten too high.
Alaska, an 84-year-old airline based in Seattle, has an
investment-grade credit rating, no net debt and $1.3 billion of
cash, according to its latest financial disclosures. JetBlue, which
began flying in 2000, had $876 million of cash at year-end and an
undrawn $600 million credit line. Its debt stood at $1.8 billion.
Due to low fuel prices of late, both are highly profitable.
The combination of Alaska and Virgin America, which is expected
to undergo scrutiny from the U.S. Justice Department, would create
the No. 5 U.S. airline by traffic, eclipsing JetBlue, which
currently holds that spot. But the combined company still would be
very small compared with the largest four U.S. airlines, all
expanded by recent mergers, that control more than 80% of domestic
capacity.
San Francisco-based Virgin America, which began flying in 2007,
is 54%-owned by Richard Branson's Virgin Group Ltd. and New
York-based Cyrus Capital Partners LP. The company went public in
November 2014.
The addition of Virgin America would materially boost Alaska's
presence at important airports in San Francisco and Los Angeles.
The two have only six routes that overlap and their costs are
similar.
For all of 2015, Virgin America's unit cost—the cost to fly a
seat a mile, excluding fuel and profit sharing—was 7.47 cents.
Alaska's unit cost in its jet division, excluding its commuter
planes, was 7.39 cents.
Dubbed an industry hybrid, Alaska is one of the few
pre-deregulation airlines to avoid bankruptcy-court protection. The
company, a traditional network airline like its larger rivals, has
been cutting its costs for more than a decade to fight incursions
into its West Coast base by Southwest Airlines Co. and others.
Alaska has low costs but still offers passengers some perks
without a plethora of fees. It also expanded its route map and now
serves most major markets in the East and Midwest and recently made
a big bet on Hawaii. It routinely wins customer-service awards, is
known for being punctual and enjoys relative labor peace.
Virgin, which has 57 aircraft, 2,600 employees and carried 7
million passengers last year, only turned profitable in 2013. But
it also wins customer-service awards and has a devoted following in
Silicon Valley. It recently launched service to Hawaii, Denver and
Love Field in Dallas and services transcontinental routes from Los
Angeles and San Francisco to the East Coast.
While Virgin is an Airbus operator and Alaska's jet fleet is
exclusively Boeing Co., some experts don't expect that to matter,
given that the economics of operating a single fleet type diminish
if the second fleet is big enough to bring advantages.
Write to Susan Carey at susan.carey@wsj.com, Robert Wall at
robert.wall@wsj.com and Dana Mattioli at dana.mattioli@wsj.com
(END) Dow Jones Newswires
April 04, 2016 06:45 ET (10:45 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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