Why Hawaiian Airlines is worth 270% more to a rival than to the public markets
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Shareholders of Hawaiian Airlines got a very happy surprise this week when Alaska Airlines agreed to buy their company at $18 a share, an eye-popping 270% premium over where the shares closed the prior Friday.
Why it matters: Because most acquisitions of public companies take place at a premium of roughly 30% to where the stock had been trading, exceptions to that rule are always intriguing. In this instance, there's a case to be made that the price being paid is not excessive.
The big picture: Stock is permanent capital, and companies value investors who are committed to holding their stock for the long run — often multiple decades.
- An investor seeing substantial long-term value in the company, perhaps one who bought in late 2016 at $60 per share and who had loyally held on since then, might be very unhappy at being forced to sell to Alaska at $18. After all, you can sell a company only once. Waiting for the right time to sell is a large part of the art of M&A.
By the numbers: The total amount Alaska is paying for Hawaiian is relatively small, by airline standards, at $1.9 billion. JetBlue and Spirit, for instance, which are trying to merge, are currently valued at $4.9 billion and $7.2 billion, respectively, while Alaska is worth $4.6 billion even after its shares fell in the wake of the deal announcement.
- Alaska is also paying 0.7 times Hawaiian's annual revenue, well below the industry average of 1.7 times revenue.
What they're saying: Bidders also like the idea of a knockout punch of a bid, so high that no one will dare reject it or try to top it. "It is better to win than to risk a bidding war," says Henry Harteveldt, an industry analyst at Atmosphere Research Group.
- "If Delta or American were to say we think Hawaiian would help us and would be a huge asset to our trans-Pacific futures, both of them could have stepped in with even richer offers."
Be smart: Part of the reason why Hawaiian Airlines made for an attractive takeover target is just that its stock fell from almost $30 per share in mid-2021 to less than $5 by the fall of 2023. (Even accounting for the huge spike after the merger was announced, the stock has still underperformed the S&P 500 over the past year.)
- Much of that fall was attributable to short-term issues — the Maui wildfires, a problem with the airline's engines, that kind of thing. But if short-term issues persist for long enough, the market tends to give up on assigning value to your long-term vision.
- A company like Amazon can trade on a rosy far-off future; a company like Hawaiian Airlines cannot.
By the numbers: Except for a single small profit in the third quarter of 2021, Hawaiian Airlines has posted a loss every quarter since the pandemic hit.
- The cumulative losses since the first quarter of 2020 come to over $1 billion — more than the equity value of Hawaiian Airlines at the acquisition price of $18 per share.
Between the lines: Hawaiian has brand-new Dreamliners coming into service this spring; Alaska might love the short-term opportunity to put those planes to more lucrative use on other routes long before it's able to take possession of its own.
Our thought bubble: CEOs love to complain about how the stock market cares too much about quarterly earnings rather than long-term potential. Leaders of acquisitive companies, however, can turn such dynamics to their advantage.
The consolidation strategy
There are real economies of scale in airlines — not only in back-office operations like ticketing and scheduling but also in having an extensive route network.
- While Hawaiian has been struggling as a standalone airline, its trans-Pacific network holds enormous potential strategic value.
- For people flying from New York to Sydney or Boston to Tokyo, for instance, there's no reason not to connect in Honolulu rather than Dallas or Los Angeles.
What they're saying: "Hawaiian's network looks better than PanAm's in the 1960s, when Honolulu was still a major trans-Pacific gateway," says Atmosphere's Harteveldt.
- PanAm is one of those storied airlines that no longer exist — alongside TWA (which was bought by American), Northwest (bought by Delta), Continental (bought by United), or even AirTran (bought by Southwest).
Where it stands: Two big questions face antitrust regulators. The first is whether Alaska, fresh off digesting Virgin America, should be prevented from getting even bigger, or whether this kind of growth is necessary for Alaska to compete with the big three airlines.
- The second is whether the state of Hawai'i, in particular, will be harmed by this merger. That's one reason why the official merger website goes to great lengths to underscore that the Hawaiian brand, route map, and headquarters will remain.
The bottom line: With Hawaiian's shares trading at $13.76, the market is pricing in a high probability that the merger will end up being blocked by regulators.
- Even if it fails, however, Alaska's bid has revealed real value in Hawaiian Airlines, which means it's unlikely we'd see those shares fall back below $5.
