Delta May Buy 49% Of Aeromexico: Does It Make Sense?

• Delta Air Lines, Inc. DAL shares have been volatile through 2015, and have lost 3 percent year-to-date.
• Deutsche Bank’s Michael Linenberg maintained a Buy rating for the company, with a price target of $55.
• Delta’s plans to buy an additional stake in Grupo Aeromexico SAB de CV GRPAF may be positive and earnings accretive, Linenberg mentioned.

Delta has announced its plans of making a tender offer for another 32 percent stake in Aeromexico, which has been its long-time partner. Delta and its pension trust already collectively own or have the option to own 17 percent of Aeromexico.

Delta is offering Ps$43.59 per Aeromexico share, which represents a 52 percent premium to the latter’s last close. The tender is subject to regulatory approval and is unlikely to be attained until 2016, analyst Michael Linenberg stated. He added that it would increase Delta’s 2016 capex by about $600 million.

Linenberg said that Delta had made a number of strategic investments in airlines worldwide over the past several years. Earlier in 2015, Delta announced a $450 million investment in China Eastern. The company also made investments in its partner GOL.

The analyst noted that Delta had acquired a 49 percent stake in Virgin Atlantic in December 2012. Since then, Virgin Atlantic had undergone “a significant profitability turnaround,” generating margin expansion of 800 basis points in FY14.

“We view this announcement as positive as we think Delta increasing its stake in Aeromexico will be earnings accretive, similar to its investment in Virgin Atlantic which, like Aeromexico, has a material position in a major aviation market,” Linenberg wrote.