JetBlue loses out as Alaska Air agrees to buy Virgin America for US$2.6bn

Virgin America has accepted an offer of US$2.6bn (US$57/share) from rival airline, Alaska Air, a figure which, including Virgin America’s debt and aircraft lease obligations, values the transaction at approximately USD$4bn.
Virgin America began operating in August 2007 and which was set up by Sir Richard Branson in a similar vein to Virgin Atlantic, a venture that “started out of frustration,” according to Branson. If you ask what he is referring to, the answer is airline consolidation, which makes today’s (Monday) deal all the more ironic.
As Branson further wrote at the time, “As more airlines consolidated and grew larger and more focused on the bottom line, flying in the US became an awful experience.”
It is purely a move to consolidate and grow in strength that lies behind the substantial offer from Alaska Air, an offer which is at a premium of 47% based on Friday’s closing price for the company’s shares. This is also a figure 12-times higher than Virgin’s adjusted 2015 earnings. The news was also met with a drop in the price of Alaska’s share price today (Monday) amid concerns at the high price. However, Alaska are very confident in the bid level, especially now that the consolidated airline will become the fifth-largest in the USA and more able to compete with the ‘big four’ who are currently responsible for 80% of domestic capacity in the USA.
The deal also allows Alaska Air access to slots to high-traffic airports in Texas, California, and around New York, while overlap between the two merging carriers’ route maps is nominal. Alaska Air anticipates under 45% of US$225 million in contemplated annual synergies will result from cost-cutting exercises. In addition, the accepted offer from Alaska Air sees the door closed on their larger rival, JetBlue, who was also interested in acquiring Virgin America and who Alaska will now supersede in size.
Alaska Air made it clear today that this deal means planned share repurchases will be scaled back over the next two years, but the company has the financial capability of making the deal work. Alaska Air’s debt is currently rated strongly for the industry at one notch above investment grade, helped by years of profitability which have helped Alaska Air to reduce its total debt by more than 50% since 2009.
As far as Branson is concerned, according to his company’s blog, “Consolidation is a trend that sadly cannot be stopped.
“I would be lying if I didn’t admit sadness that our wonderful airline is merging with another.”
The company had been open to offers since debuting its initial public offering in November 2014. Branson himself has been left relatively powerless to stop any takeover of the company as a consequence of American legislation limiting foreign investment in US airlines to just 25%. As Branson put it:
“Because I’m not American, the US Department of Transportation stipulated I take some of my shares in Virgin America as non-voting shares, reducing my influence over any takeover, so there was sadly nothing I could do to stop it.”
It is not all gloom and doom for Branson though as The Guardian estimates Branson’s financial windfall at more than US$786 million.