AMR Merger Risk Seen Ebbing as US Airways Rallies
US Airways Group Inc. (LCC) rose to the highest close since federal antitrust regulators sued to block the planned merger with AMR Corp.’s American Airlines (AAMRQ), a sign of investor optimism that the deal will occur.
With yesterday’s 1.6 percent gain to $18.97, the shares rebounded past their price on the day before the U.S. Justice Department lawsuit was filed on Aug. 13. US Airways lost as much as 18 percent of its market value in the weeks after the government’s move.
“The initial picture looked quite dim,” said Rob Pickels, an analyst at Manning & Napier Advisors Inc., which holds US Airways shares. “But as people have dug into various precedents and the case for and against the merger, it’s my sense they are becoming more optimistic that the deal actually happens.”
Concern that the merger will fail is ebbing as investors see better odds for a tie-up creating the world’s largest carrier, according to Andrew Davis, an analyst at T. Rowe Price Group Inc., which he said held 13.4 million US Airways shares. Also boosting US Airways’ stock are the outlook for continued profits, strong travel demand and falling fuel prices, he said.
“People were so shocked that the lawsuit was even filed,” Davis said in an interview from Pikesville, Maryland. “Now they’ve gotten a little more rational and said there are a lot of scenarios that could lead to them potentially winning the case outright or reaching a settlement.”
T. Rowe Price’s holding in US Airways is about 7 percent, making it the second-largest shareholder, Davis said. The stake for Fairport, New York-based Manning & Napier is about 1 million shares, according to the company.
Investors’ conclusion that the deal ultimately will succeed is “probably the reason the stock has responded favorably,” Pickels said in an interview.
U.S. regulators stunned investors by opposing the merger, sending Tempe, Arizona-based US Airways to its biggest drop in 22 months and dragging down AMR’s shares 45 percent. Since then, the judge in AMR’s bankruptcy case approved the tie-up as part of the company’s Chapter 11 exit, contingent on the outcome of the Justice Department’s suit.
US Airways slipped 0.4 percent to $18.89 at the close in New York, joining a retreat among broader stock indexes. The shares have jumped 17 percent this month, more than tripling the 4.7 percent increase for the Standard & Poor’s 500 Index.
AMR’s shares fell 0.8 percent to $3.92 in over-the-counter trading, after closing yesterday at $3.95, the highest since the lawsuit was filed. Under the merger plan, AMR stockholders would get equity in the combined carrier.
US Airways and Fort Worth, Texas-based American are counting on their tie-up to allow them to compete with United Continental Holdings Inc. and Delta Air Lines Inc. (DAL) United and Delta are the world’s two largest carriers, and each was created through mergers since 2008.
The US Airways-American deal had been targeted to close this quarter until the government sued. They won a Nov. 25 trial date on the suit. The Justice Department, which said the combination would hurt consumers and damp competition, sought a trial date in March.
Airlines have rebounded in recent weeks amid a drop in jet-fuel prices. Jet fuel for immediate delivery in New York Harbor closed at $2.95, down from $3.18 a gallon on Aug. 28 amid concern the U.S. would retaliate against Syria over the use of chemical weapons.
US Airways’ report of planes filling a record percentage of seats in August and increased revenue from each passenger flown a mile are bolstering the shares, said Eric Marshall, president of Hodges Capital Management Inc. in Dallas, whose assets include US Airways.
“Movement in the stock is particularly related to those third-quarter fundamentals as much as a deal being back on,” Marshall said in an interview. “The stock, on its own merits, is worth where it’s trading at today.”
Hunter Keay, a Wolfe Research Inc. analyst in New York, has set the odds at 75 percent that a US Airways-American merger occurs by early 2014. He rates US Airways as outperform, the equivalent of buy.
The share movement “is more about US Airways fundamentals than the merger,” he said in an interview. Keay said in a report last month that he rated the chances of a settlement at “less than 50-50.”
“There’s never really an easy answer,” Jim Corridore, an S&P Capital IQ analyst in New York, said of the US Airways rally. “It’s definitely a more optimistic outlook on prospects to consummate the merger. And US Airways as a stand-alone company is undervalued and is doing well.”
The antitrust case is U.S. v. US Airways Group Inc., 13-cv-01236, U.S. District Court, District of Columbia (Washington). The bankruptcy case is In re AMR Corp., 11-bk-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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