Alaska Air Group (NYSE: ALK) has a deal to acquire the parent of Hawaiian Airlines for $1.9 billion in cash and assumed debt.
The deal is sending shares of the two companies in opposite directions, with Hawaiian Holdings(NASDAQ: HA) up 187% as of 12:30 p.m. Eastern and shares of Alaska down 15.7% in the same time frame. Investors often get nervous about acquisitions made at a high premium, but this is a deal that makes sense for both airlines.
A massive premium for a niche brand
Alaska is offering $18 per share in cash for Hawaiian, a premium of 270% to the target's $4.86 Friday closing price. But even with that premium, Alaska would pay just 0.7 times revenue, including debt to be assumed.
Investors tend to send the share price of the buyer into the red, and indeed in many cases, acquisitions can weigh on companies and cause them to underperform. But Alaska has recent experience integrating mergers, having bought Virgin America in 2016, as well as a relatively strong balance sheet.
Alaska has about $10 billion in assets available to borrow off of, including $3 billion in unencumbered aircraft and its massive loyalty program. The airline said it expects at least $235 million in annual cost savings once the deal is complete and fully integrated.
Alaska is able to get Hawaiian on the cheap because investors have been worried about the health of its balance sheet. The company has a significant number of aircraft on order, including freighters to be operated for Amazon, but has struggled to get airborne following the pandemic.
Is Alaska Air a buy following its big deal announcement?
A combination of the two companies would make a lot of sense for both parties.
For Alaska, the addition of Hawaiian would give it significant exposure to the Asia-Pacific region and provide connections to alliance partners in Japan and Australia. For Hawaiian, the deal would create a company less reliant on one destination and open significant portions of the U.S. mainland for nonstop or one-stop service.
But it is uncertain whether regulators will allow the combination. Lawmakers in Hawaii have historically been very protective of the state's aviation industry, in part because air travel is a necessary part of everyday life when you need to go from island to island. And the Department of Justice has taken an unfavorable view on airline consolidation, taking JetBlue Airways to court over its planned purchase of Spirit Airlines.
On paper, the Alaska/Hawaiian combination should be an easier sell to regulators than JetBlue/Spirit. But even if approved, the deal is likely to take more than a year to close.
Investors have every reason to be excited about the potential combination. But given the risks involved and the uncertain timeline, there is no reason to rush into Alaska shares right now.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lou Whiteman has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends Alaska Air Group and Hawaiian. The Motley Fool has a disclosure policy.
