US-DL Merger: US' For The Record - Dec. 19, 2006

[abe]

You'll get cash quicker but not at the high value to make it worthwhile. Delta's own valuation which is not a lock goes till 2010. I doubt it will be trading super high right out of the gate.

There are no guarantees to either plan and both of them have their pros and cons.

Really? What will Delta's stock price be after they emerge from BK? How much stock will each creditor get?

These questions have yet to be answered, as far as I know.

I know there are a lot of cons to Parker's plan....what are the cons to Jerry's (besides the fact that no cash is being offered, yet)?

Abe

I think you may have misinterpreted the valuation. The presentations contain estimates of financial performance out to 2010, but I'm pretty sure the valuations mentioned are upon BK exit. But, I may be wrong.

 

[Gilding the Lily]

I think you may have misinterpreted the valuation. The presentations contain estimates of financial performance out to 2010, but I'm pretty sure the valuations mentioned are upon BK exit. But, I may be wrong.

Nope, he is right about the 2010 financials and "Consolidated Equity Value."

This is a quote from DL's Plan Disclosure statement:

"Blackstone developed a valuation for the consolidated Reorganized Debtors based on the Financial Projections provided in Appendix D of the Disclosure Statement. As noted in the Valuation Analysis, subject to the assumptions and caveats noted therein, the pro forma consolidated equity value of the Reorganized Debtors is estimated to be $9,400 million to $12,000 million.... The Valuation Analysis is based on numerous qualifications and contingencies, including but not limited to: (i) the Debtors ability to achieve all aspects of the Financial Projections..."

Thus, as I stated a few posts earlier, DL's projected "Consolidated Equity Value" is its projected value after reaching all its financial goals by year 2010. In other words, the plan does not expect the new DL stock to be worth 63-80% of the creditor's claim until 2010.

 

[Redbone]

An Important Message from Doug Parker - December 19, 2006

Dear US Airways Employees:

By now you have likely read news coverage of Delta’s Plan of Reorganization, which was released publicly earlier today. Also today, Delta’s Board of Directors formally rejected our merger proposal and I have received a letter from Jerry Grinstein, Delta’s CEO, communicating this information.

Today’s announcement comes as no surprise to us, and based on Delta’s public comments and actions after our proposal was communicated to them last month, will likely not come as a surprise to anyone else either. Delta’s executives have been adamant about their desire to emerge as a standalone company in spite of having recently had the opportunity to compare value returned by a merged airline versus a standalone airline (US Airways vs. United). While we are disappointed that Delta has not yet accepted our request to start a due diligence process, we believe the Delta Creditors Committee and other stakeholders will ultimately insist that this process occur before selecting any go-forward plan.

Delta’s standalone plan and ensuing public comments do not alter our belief that a combined airline creates far more value than a standalone plan. Our merger proposal, which we estimate would create $1.65 billion in annual synergies that are not achievable in a standalone plan, simply provides greater value than Delta estimates for its plan. (Editor’s Note: A separate For the Record explaining valuation is coming shortly…so gather the kids, pop some popcorn and settle in for a great read!)

While the market attempts to digest Delta’s announcement, assumptions and valuation forecasts, we will remain steadfast in our resolve to return maximum value to our shareholders and to Delta’s stakeholders. We will not be distracted by emotional or irrational arguments; there is simply too much at stake to lose sight of what is really important.

We will continue to work with the Creditors Committee and other stakeholders in a methodical and deliberate process to ensure that the best go-forward plan prevails, and we will do so while adhering to the guiding principles that have led us thus far. These include communicating openly and honestly with all of our stakeholders; demonstrating continued respect for the people of Delta; and working with Delta’s creditors as they are ultimately the decision-makers for Delta’s future. Because of the $1.65 billion in synergies, we remain confident that our merger proposal will ultimately prevail.

As always, please keep an eye on Compass, theHub and company communications as we examine the Delta standalone plan and respond when appropriate. Keep those questions coming too, and those can be sent to [email protected].

Lastly, in the days ahead, thank you for taking care of our customers as they travel to visit family and friends. We have the privilege of carrying a large number of passengers over the next two weeks and your efforts to ensure our airline runs on-time and delivers baggage when promised are appreciated. Thanks again, and happy holidays!

Doug
US Airways Comments on Delta Standalone Plan - December 19, 2006

US Airways Group, Inc. today commented on the release of Delta Air Lines Inc.’s standalone plan for its Chapter 11 restructuring.

Doug Parker, US Airways’ Chairman and CEO said, “We have always expected that Delta would file a standalone plan with the Bankruptcy Court. This plan will provide Delta creditors with a benchmark against which to evaluate the competing proposals and we welcome that comparison. This is an important step in a process that we believe will result in the merger of US Airways and Delta.

“Combining US Airways and Delta will create at least $1.65 billion in annual synergies beyond the value that could be created by any standalone plan. These synergies come on top of the certainty of $4.0 billion in cash and the upside potential of 78.5 million shares of US Airways stock. These shared synergies will benefit all shareholders in the ‘New’ Delta. Factoring the synergy benefits into our offer, the current value of our proposal is significantly greater than the value of Delta’s standalone plan.

“We remain a disciplined and determined bidder for Delta. We continue to work productively with the Creditors Committee and the Ad Hoc Bondholders Committee. Finally, we recognize and appreciate the creditors’ ultimate authority in this process.â€

US Airways is the fifth largest domestic airline employing nearly 35,000 aviation professionals worldwide. US Airways, US Airways Shuttle and US Airways Express operate approximately 3,800 flights per day and serve more than 230 communities in the U.S., Canada, Europe, the Caribbean and Latin America. The new US Airways -- the product of a merger between America West and US Airways in September 2005 -- is a member of the Star Alliance, which provides connections for our customers to 841 destinations in 157 countries worldwide. This press release and additional information on US Airways can be found at www.usairways.com. (LCCG)
For The Record: Valuation (US Airways’ Periodical Merger Newsletter) - December 19, 2006

Since we announced our proposed merger with Delta, much has been written about the value of our proposal and how it would compare to the value of Delta’s standalone plan. Now that Delta has released its plan, every interested party – especially Delta’s creditors, who have the ultimate authority in this process – will have the chance to compare the competing proposals. This “valuation†of proposals is an important piece of the bankruptcy process and is key determinant of which plan will eventually prevail. Unfortunately, it’s a little complicated (although we think the investment bankers like to keep it that way so they can feel so much smarter than the rest of us!) so in this For The Record, we will try to clear up some of the confusion.

Delta Standalone Valuation

Let’s start with the value that Delta is saying their standalone plan is worth. They filed a set of financial projections this morning with the Bankruptcy Court and at the same time said their investment bankers, The Blackstone Group, believe the value of those projections to be approximately $9.4 to $12 billion. Now we don’t know exactly how they came up with that valuation, but we’ve hung out with enough investment bankers to tell you that it is not exactly rocket science (although don’t hold our selection of friends against us…some of these banker types actually DO have personalities believe it or not).

Here’s how it work’s: Generally what they do is take on of the year’s earnings estimates (say 2007) and then multiply that year’s earnings by some “multipleâ€. A company’s “multipleâ€, which is also called a price/earnings ratio, is supposed to give investors an idea of a company’s earnings power. In this case, investment bankers use an industry “multipleâ€, and that industry “multiple†is supposed to be based on how the stock market is currently valuing other similar, publicly traded companies (in this case it’s US Airways, America, United, Continental). As you might imagine, you can get some pretty wide ranges of estimates by either being aggressive with your earnings projections or being just a little generous with that volatile “multipleâ€. When it’s all said and done though, it shold look reasonable versus other publicly traded companies.

Let’s look at how Delta’s self-estimated valuation compares to the rest of us:

Airline/Valuation (in billions)
Southwest - $12.4
Delta (self evaluation) - $9.4 to $12.0
American - $6.7
United - $5.0
US Airways - $4.9$
Continental - $3.9

Anything look out of line here? Now call us skeptical, but does anybody really believe that a Delta standalone plan could be worth as much as Southwest? A more relevant comparison is probably United, because they emerged from bankruptcy in 2006, with a new balance sheet and lowered costs like Delta. They are about 25 percent larger than Delta and their profit margins (how much money they make on each dollar of revenue collected) so far in 2006 are actually higher. It is odd that Delta thinks the stock market will value them twice as much has United, and today’s announcement does not provide any light on the basis for Delta’s assertions.

Delta/US Airways Merger Valuation

But let’s not stop there; we need to focus on running our own race and that brings us to the value of our proposal. We have offered the Delta creditors (who truly won Delta because Delta is in bankruptcy) the following:

· $4.0 billion in cash
· 78.5 million shares of US Airways stock

Now the cash part is easy - $4.0 billion is $4.0 billion – no investment bankers needed for that one. However, the stock part gets a little trickier. If you read media reports, they usually take the 78.5 million shares and multiply that number by US Airways’ current stock price (say $58) and come up with a value for the stock. In this example $58 x 78.5 million shares = $4.6 billion, so you may read that our offer is worth a total of $8.6 billion dollars.

While this is all quite logical, the problem is this is not an apples-to-apples comparison to the Delta self-valuation. In order to ge a more valid comparison, we would have to:

· take our earnings estimates for US Airways standalone
· add them to Delta’s standalone earnings estimates
· add our $1.65 billion in anticipated merger synergies
· multiply that number by Blackstone’s “multipleâ€

The result of that would be a much higher number than Delta’s self-assessment. This basically means that if you calculate the value of our offer using Delta’s methodology, we estimate our offer today is worth in excess of even Delta’s $12 billion self-valuation and far more than $8.6 billion.

Stated another way, the current stock price of LCC is not a fair representation of the value the creditors will receive. WE believe that once we close this transaction and begin realizing synergies, our stock will trade well above its current value of $58 and therefore the creditors will receive much more than $4.6 billion in value for their 78.5 million shares.

Summary

So where does all of this leave us? Basically, you’ll be hearing a bunch of numbers thrown out over the coming weeks but try to keep them in perspective. We are a highly skeptical of Delta’s self-valuation and we know the media reports of the value of our offer are understated. In spite of these conflicting messages, we continue to believe in, and will continue to communicate the value of our offer, an offer that is far superior to the Delta standalone proposal.

Worth mentioning of course, is that the creditors understand all of this and ultimately, Delta’s future will be theirs to decide. That’s the way it should be, and we are confident that they and their advisors will come to the right decision and that the US Airways/Delta merger will prevail.
Delta: US Air deal would hike fares – No. 3 carrier rejects hostile bid, arguing regulators would block proposed $8.4 billion merger, but rival says it’s not going away

See Story

Regards,

USA320Pilot

What you and Parker leave out is the massive DEBT load that the proposed company will carry. This versus a far more stable Delta as a stand alone airline.

US Airways can't even complete the merger that it is currently involved in. Furthermore, it is banking on chopping up Delta employees and pay scales while in BK.

This whole scenario stinks to high heaven. This guy Parker is hell bent on this because he knows this will be US Air's ONLY window of opportunity. It will be eaten alive down the road. Delta and NW will be competitive killing machines once out of BK...he knows that (that's why he is REFUSING to merge US's pilots contracts)

He didn't come after NW because of the sheer ferocity of it's leaders and Labor. Delta was a softer target (no offense).

He has far more to fear from a Post BK Delta...esp. now.

 

[BoeingBoy]

Not quite the way I read the value analysis.....

Blackstone did two types of value analysis - comparable company analysis and discounted cash flow - then blended the results together.

In the comparable company analysis, Blackstone used a group of "peer" airline's (AA, CO, UA, US) estimated 2007 revenue and EBITDAR to calculate a company value multiple. Blackstone then used that multiple range applied to DL's forecast 2007 (and only 2007) revenue and EBITDAR projections.

In the discounted cash flow analysis, Blackstone did use the projections out to 2010, but used that to calculate the present value of expected future cash flows as of April 30, 2007. They used a pretty healthy assumed interest rate to discount the future cash flow - 12 to 14%. Using a lower interest would have increased the discounted cash flow valuation.

They then combined the two, using 40% of the comparative company value and 60% of the discounted cash flow value. This produced a valutation between 18.2 and 20.8 billion. Subtracting the estimated net debt produced the numbers seen everywhere.

Jim

 

[Gilding the Lily]

Sure, I understand that the "Consolidated Equity Value" is the hypothetical value that reflects the estimated intrinsic value after its predicted financial performance through 2010 has been discounted. That discounted value, upon exit from bankruptcy, is 9.4b to 12b. Although discounted to represent a hypothetical value at time of bankruptcy exit, that still is a projected value based upon hitting its financial marks through 2010.

My point, however, is that creditors receiving new stock will not have the ability to transfer those stocks in to 63-80% claim recovery until DL has met those financial goals, as the market often sets a company's value because of past performance. Of course, the market does take "forward-looking statements" into account while assigning value, but the past performance is a better indicator of its future value... and market movers recognize that.

Moral of the story: Sure the hypothetical, projected, discounted value may be estimated at 9.4b to 12b at the time of bankruptcy exit; but the market, and more importantly, the stock price will not represent that value. The creditors may prefer to liquidate their new DL stock at the earliest time possible, but it certainly will not represent the 63-80% recovery that corresponds with the 9.4b to 12b projected value. The creditors would need to wait until 2010 to receive that recovery, unless all the other airlines fall off the face of the earth.

 

[BoeingBoy]

Yes, the discounted cash flow part take the longer term cash flow projections and applies what is in effect a net present value to that, but that's not the end of the valuation analysis - is it?

There's the comparative company analysis that only looks at 2007 projections. This is blended with the discounted cash flow analysis.

So only part of the value is driven by cash flow projections into the future. The other part is only driven by 2007 results. The result is in effect a compromise - short term combined with long term.

As for stock price, I doubt even you know for sure what the stock will do after bankruptcy exit - no matter whether that stock is DL or US. It could go up 25% in a little over a month as UA did, go up 80% in a couple of months like US did, or fall flat on it's face. Just something else for the unsecured creditors to consider as they decide how to vote.

Just for grins, I dug out the valuation analysis for the US POR/HP merger and found this:

"reviewed certain financial projections prepared jointly by the Debtors’ senior management and America West Holdings Corporation’s senior management for the operations of the Reorganized Debtors in combination with America West for the years 2005 through 2009"

Interestingly, Seabury (who did the analysis for the US/HP POR/merger) used the same comparative company analysis and discounted cash flow analysis (using 2005 and 2006 projections) as Blackstone used in the DL case. It didn't take long for the US stock to exceed the value Seabury placed on it - $23 and change.

Jim

 

[abe]

Interestingly, Seabury (who did the analysis for the US/HP POR/merger) used the same comparative company analysis and discounted cash flow analysis (using 2005 and 2006 projections) as Blackstone used in the DL case. It didn't take long for the US stock to exceed the value Seabury placed on it - $23 and change.

Jim

Jim and Lily,

So to go along with the nice stock performance, were the benchmarks met (at least for this first year of the merger) "as forecasted" in Seabury's analysis?

(As you both know, UAUA has been a wild ride opening at around 33...shooting up to 43...then down to 23....and now recently back up to the 43-46 range.)



Let me see if I have this straight now! In a nutshell, Blackstone and Delta are forcasting a Consolidated Equity Value of 9.4B-12B on April 30, 2007.

Assuming a claim pool of 15 Billion, and either end of that range (9.4 or 12) you arrive at the 63-80 cents on the dollar claim recovery (for April 30, 2007).

And all of this is based on projections by Delta using 2 different methods: One method uses 2007 projections for revenue and EBITDAR, along with how the market values airlines that are not in BK protection, and comes up with a number. The other method looks out at future performance (2010) projections and "backs it up" to 2007, and comes up with a number. The numbers from these 2 methods are then combined to come up with the 9.4-12B.

Is that correct (or at least close) ??


Abe

I may not have it exactly...but I think I'm starting to understand!
Thanks to both of you for the clarification on this stuff for the brain cell deficient among us (me).

 

[Walmartgreeter]

I may not have it exactly...but I think I'm starting to understand!
Thanks to both of you for the clarification on this stuff for the brain cell deficient among us (me).
[/quote]


I really enjoy a thread where I can learn something. Brain cell deficient? I don't think so. I hope I never again have to become familiar with the ins and outs of BK..for any reason. It is hard not to be emotional, even to take your own airline's "side" in all this..but this is all playing out at a level far above that of anyone lower than a VP. At this current level of exchange, a few posts excepted, this has actually become a Forum. Greeter.

 

[BoeingBoy]

abe,

That's pretty much the way my layman's brain understands it. The main difference is that Seabury put the company value in dollars per share based on the number of shares to be issued as stated in the POR (and gave a range with the $23 & change being the middle) while Blackstone just gave a company value.

The point of mentioning the US case was simple. Just looking at the US POR and valuation analysis, someone could have said it would take years for the stock to be worth what Seabury valued it at since the valuation was based on projections going out 5 years. Yet the stock eclilpsed even the high end of Seabury's valuation within months.

Jim

 

[Gilding the Lily]

I was recently asked "what happens if the unsecured creditors cannot decide on a plan?" Although this is not likely to happen and, in fact, only occurs in a limited number of cases, I thought I would share what can happen through the bankruptcy process.

DL had until the middle of February to exclusively file its plan. It has until the middle of April to exclusively solicit the acceptance of such plan. I presume that the creditors will wait until after February 15th to accept a plan. US can officially file its plan after the middle of February. If the creditors think that both plans are decent, but cannot determine what plan is better, the creditors can actually accept both plans.

Although the Code does not restrict a holder's right to accept more than one plan, it does provide that only one plan may be confirmed. And although unlikely, it is possible that more than one plan may be accepted by the requisite majorities of each class of creditors and equity security holders (or each rejecting class is effectively crammed down).

If this happens, the Code provides that the court decides which plan to confirm, taking into consideration the relative preferences of creditors and equity security holders in respect of each plan. Among the other issues to be considered by the court would appear to be the extent to which any plan required use of the cramdown provisions to meet the confirmation standards, the position of the debtor with respect to the separate plans, the position of the DOJ and SEC, the court's view of the relative feasibility of each plan, and the relative size of the votes of creditors and equity security holders for acceptance or rejection of each plan. In addition, consideration should be given to the effect of each plan on the post-confirmation business of the debtor, including the number of employees to be retained by the debtor, the impact of any proposed closings, the ability of management to make any required operational changes and the ability of the debtor to meet restrictive covenant tests inherent in each plan.

The Court will almost always order a separate valuation as well. So... against popular opinion on these boards, it is possible for the "employees" to be a deciding factor in this case. I admit, however, that this scenario is unlikely.

 

[eolesen]

Where I see it coming down is whose plan is more credible.

DL has the company taking on a lot of new debt, and repaying creditors with promises, and no real plan for dealing with the real issues which are the LCC carriers eroding their market share and margins. I'm especially curious to see how DL will achieve a 10% margin when Jetblue and Southwest can't get out of the single digits.

US has the company taking on debt as well, but is offering half cash and half stock, which is more than just a promise. Strategically, they've competed very well with Southwest and aren't exposed much to Jetblue, but are also exceeding the business plan they put forth for the HP/US merger.

Granted, there are still labor integration issues to resolve, but overall HP/US has proven many people, myself included, wrong. It is working.


For disclosure, I am employed by an unsecured creditor for Delta. Given the choice between a team willing to take risks and who has already turned a failing company around, or sticking with the same team who did nothing until it was too late, I think I know which way I'd lean if I had a seat on the unsecured creditors committee.

It's not about the money. It's about future business, and I'm not so sure that letting DL exit bankruptcy with an unattainable business plan makes sense. US1 failed for that same reason.



DL777, you comment on US1's failures. That company no longer exists, so you'd be better off focusing on the company making a play for your employer, rather than attacking the memory of the carcass that was left behind 18 months ago.

Likewise, the comments on HP's 1991 bankruptcy are a red herring. Very little of Beauvais's and Franke's legacy are left behind, and Parker's management team wasn't part of that debacle anymore than Hollis Harris is responsible for DL's current situation.

 

[abe]

For disclosure, I am employed by an unsecured creditor for Delta.

I'm going to go out on a limb here and guess that you are not real high-up with this "mysterious" creditor.

I mean, you probably have a nice house in the 'burbs and all the trimmings that go with it, but you are just a middle management lacky...am I right?

And, if by chance, you are a "world beater" with your current company, my advice to you is to do a little more research and correct your obvious mistakes in this post. Otherwise, your boss might cut you out of the holiday bonus program.

Even USAPilot, who at least makes an effort to separate fact from fiction, is probably cringing!

Your little "disclosure" about being employed by a Delta creditor makes you sound more like a "chump" than "champ"...but that's just me.


Abe
I'm a lacky in all this, but admits it...

 

[Redbone]

I'm going to go out on a limb here and guess that you are not real high-up with this "mysterious" creditor.

I mean, you probably have a nice house in the 'burbs and all the trimmings that go with it, but you are just a middle management lacky...am I right?

And, if by chance, you are a "world beater" with your current company, my advice to you is to do a little more research and correct your obvious mistakes in this post. Otherwise, your boss might cut you out of the holiday bonus program.

Even USAPilot, who at least makes an effort to separate fact from fiction, is probably cringing!

Your little "disclosure" about being employed by a Delta creditor makes you sound more like a "chump" than "champ"...but that's just me.
Abe
I'm a lacky in all this, but admits it...

nolonger a moot point. US Air is out.

 

[LGA Fleet Service]

I'm a lacky in all this, but admits it...

Actually abe, you're just an @sshole, but we already knew that.

 

[abe]

My post above to Former ModerAAtor was meant to be sarcastic and an attempt to poke fun at our different views on this deal.

Today when I reread it, it seems harsh and out of line.

To Former ModerAAtor, I apologize.

No more late night posts after a couple of beers...


Abe