With the merger set to close in December, investors are waiting to see if they’ll end up with more than 3.5 percent of the new company.
But figuring out what much they’ll get is very complicated.
AMR’s unsecured creditors have claims against AMR and American totaling an estimated $5.6 billion before accrued interest. These creditors will receive preferred stock on Day One of the new company that will convert to common stock on Day 30, Day 60, Day 90 and Day 120 to pay off their claims.
As part of the new labor contracts negotiated during bankruptcy, American’s labor unions and other nonunion workers were also promised an equity stake of 23.6 percent of the total claims allowed by AMR, which for employees is valued at about $1.7 billion, assuming the other two creditor groups are repaid in full.
The estimated total amount of claims is $7.28 billion, according to the disclosure statement filed by AMR with the bankruptcy court on June 5. Based on various assumptions, all $7.28 billion in claims will be paid if the new combined carrier’s stock price trades at $14.99 a share or higher during a five-day period prior to the 30-, 60-, 90- and 120-day mark after the merger closes.
At that share price, the 3.5 percent equity stake that AMR shareholders received after the merger would be worth around $400 million and the new company will have a market capitalizaton of approximately $11 billion.
However, if the new company’s market cap is higher than that — because the share price has risen above $15 — there will be excess equity in the new American. Since the unsecured claims are a fixed value, the extra equity would be distributed among the old AMR shareholders at the same 30-, 60-, 90- and 120-day marks.
US Airways shares closed at $23.89 Friday, giving it a market cap of $4.7 billion. US Airways shareholders will receive one share of new American stock for each share they own of US Airways, and according to the merger agreement will receive 28 percent of the equity in the combined carrier. So if the merger were to occur now, the market cap of the new airline would be around $17.95 billion.
If the new combined company is worth $17.95 billion on the 120th day after the merger is completed, all of AMR’s unsecured creditors and labor unions would be paid in full plus interest and the old AMR shareholders would be given the excess equity value, almost $5 billion in this scenario, in the form of additional shares. AMR’s filing shows old AMR shareholders could end up holding 28 percent of the new company’s equity under this scenario, which is almost the same amount that existing US Airways shareholders will have received.
“Given the dynamics of claims recovery associated with a successful merger, we estimate that holders of [AMR stock] could witness outsized potential gains at [US Airways’] current share price,” J.P. Morgan analyst Jamie Baker told investors in a research note last week..
On the flip side, if the share price of the new American drops below $15, the value of the 3.5 percent equity stake owned by AMR shareholders will be worth much less and they would not have received any additional equity.
End of the rainbow
Although airlines stocks as a group have increased this year, the large increase in AMR’s share price means some investors will likely sell off the stock to reap profits.
“Profit-taking is inevitable,” Baker said, noting that AMR’s shares are up 1,300 percent and US Airways shares up 70 percent year-to-date.
In fact, shares of AMR have declined slightly this week, down 12 percent from a high of $13.50 reached the day the antitrust settlement was announced.
Shelly said he doubts hedge funds would hold onto American’s stock or shares of the new company as a long-term investment and institutional investors, who own US Airways shares, will likely re-evaluate their holdings once the merger is completed. When the merger closes, existing stock will be exchanged for new shares in American Airlines Group, which will trade under the ticker AAL on the Nasdaq exchange.
“We had a situation where everybody was happy and then the DOJ nixed it and now it’s back on again,” Shelly said, describing the ups and downs of American’s situation since it announced its proposed merger in February. “Hedge funds tend to like volatility because that’s where they make money.”
But for those individual investors who have held on to their AMR stock through the two-year bankruptcy process, there may be a pot of gold at the end of the rainbow.
“It is rare that equity holders come out with anything at all and in this case it looks like it could be a very good deal,” Lockwood said.
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