Math Shows A JetBlue Or Alaska Air Merger With Virgin Is 15% Accretive

Virgin America Inc VA is reportedly considering a sale of its operations, while JetBlue Airways Corporation JBLU and Alaska Air Group, Inc ALK have emerged as potential bidders.

UBS’ Darryl Genovesi believes such a deal will result in a modest slowdown in the overall industry supply growth.

“While fleet commonality with VA has been frequently mentioned as advantage for JBLU, JBLU also has more financial leverage and more strategic initiatives already underway, making a major acquisition a more difficult proposition for it than for ALK,” analyst Darryl Genovesi wrote. He has a Buy rating for both JetBlue and Alaska Air.

Deal To Be Accretive For JetBlue And Alaska

A standalone Virgin America is expected to post an EPS of $3.64 in 2016. The company’s 2016 EBITDAR is estimated at $505 million, on revenues of $1.69 billion, representing 10 percent y/y revenue growth, and capacity growth of 14 percent.

Genovesi expects the deal to be nearly 15 percent accretive for the acquirer at Virgin America’s current share price. This is based on the assumption of a $2 billion debt issuance to cover equity and debt, while cash in Virgin America’s books accruing to the buyer’s balance sheet.

“We assume $300M in incremental EBIT including modest deal synergies and $100M in incremental interest expense at 5% cost of debt, resulting in $0.35-0.40 EPS accretion for JBLU and ~$1.00 for ALK,” the UBS report stated.