Alaska Air Talk Takes Off as Delta Seen Bidding: Real M&A

Alaska Air Group Inc. may lure takeover interest from Delta Air Lines Inc. with its Seattle hub and ability to generate more profit from its assets than most carriers.

The smallest of the six remaining major U.S. airlines after the US Airways Group Inc.-AMR Corp. merger closed Dec. 9, Alaska stands out as a well-run company with an appealing West Coast route network, said shareholder Diamond Hill Capital Management Inc. The $4.9 billion company, which has been profitable since 2009, offers suitors one of the industry’s most fuel-efficient fleets and a return on assets that’s higher than 88 percent of global airlines, according to data compiled by Bloomberg.

Delta may want to buy Alaska to ferry additional U.S. passengers to Seattle for international flights the carrier is adding there, said Imperial Capital LLC. Even after surging 64 percent this year, Alaska would be a bargain for a buyer, said James Investment Research Inc. Net income is on pace to hit a record in 2013, and the company is more affordable relative to its profit than 82 percent of peers, data compiled by Bloomberg show.

Acquirers “like to find those bargain kind of companies that are profitable,” David James, director of research at Alpha, Ohio-based James Investment, said in a phone interview. “I could see one of the bigger ones looking to take them over. It’s got a really good niche market within Alaska and then some other key parts within the continental United States and Canada.”

James Investment oversees about $4.8 billion, including shares of Seattle-based Alaska.

Remaining Independent

“We have said for many years that our preference is to remain a strong, vibrant, independent company,” Alaska Chief Financial Officer Brandon Pedersen said by e-mail in response to questions about a possible takeover. “We think our current plan provides the best outcome for all of our stakeholders -- including employees, customers and shareholders.”

Pedersen, who declined to comment on specific acquisition proposals, said the carrier continually works on profitability to ensure a return on investment for shareholders.

With the merger of US Airways and AMR’s American Airlines capping more than a decade of industry consolidation, Alaska is “clearly one of the more attractive things still left out there,” Bob McAdoo, a Los Angeles-based analyst at Imperial Capital, said in a phone interview.

Alaska’s Profitability

One lure for suitors may be Alaska’s high returns and profitability, said James of James Investment. The airline, which primarily serves Alaska and destinations along the West Coast, is poised for record net income of $494 million this year, according to analysts’ estimates compiled by Bloomberg.

“Within the airlines, it usually seems a lot more like the least-ugly contest,” James said. “You have the least ugly taking over something that’s uglier. Alaska Air might be a little different than what we’ve been seeing. They’re the ones that seem to be doing it right.”

He estimates the company could fetch about $80 a share in a sale, compared with yesterday’s closing price of $70.57.

Today, Alaska rose 4.2 percent to $73.50 for the biggest gain since Oct. 1. It was also the largest increase in the Bloomberg World Airlines Index.

The carrier, which also owns the Horizon Air regional operation, boasts one of the industry’s youngest and most fuel-efficient fleets, CFO Pedersen said at the company’s investor day last month. Alaska uses fewer gallons of fuel for each seat flown a mile than any other carrier in the U.S. except Virgin America Inc., according to a presentation for investors, based on 2012 data. Spirit Airlines Inc. wasn’t included in the ranking.

Seattle Hub

Alaska’s return on assets is 8.4 percent, almost four times the median for global airlines valued at more than $1 billion, data compiled by Bloomberg show. This year, the company started paying a quarterly dividend for the first time.

Alaska’s position in Seattle and other West Coast markets may draw airlines trying to build their business in the area, which makes Delta a logical suitor, said McAdoo of Imperial Capital and Jason Downey, a Columbus, Ohio-based analyst at Diamond Hill.

Delta has been expanding in Seattle as part of a broader plan to offer more direct flights to Asian cities through U.S. gateway airports that collect passengers from across the country. This week, Delta said it plans to operate 79 daily departures in Seattle to 25 cities by mid-2014, up from 35 flights to 15 destinations now.

Regulatory Hurdles

Delta is “obviously developing Seattle as an important market for them so I think for that reason Alaska comes to mind” as a potential target, said Downey, whose firm oversees about $12 billion and owns shares of Alaska. “There’s some attractiveness with how they fit into the overall network.”

To Hunter Keay, an analyst at Wolfe Research LLC in New York, Delta’s Seattle growth signals that it probably isn’t interested in Alaska. Routes overlapping with Alaska’s network could raise red flags with regulators, he said. Still, Keay said any buyer other than Delta would probably face even bigger hurdles for U.S. approval. Delta already has a marketing agreement with Alaska, as does American Airlines.

The U.S. Department of Justice filed suit to block the American-US Airways combination, a challenge that eventually was settled.

Higher Premium

Chris Terry, an analyst at Hodges Capital Management Inc., said any deal for Alaska is unlikely to attract that same level of scrutiny, although regulators may require divestitures. Terry is based in Dallas and his firm oversees about $1.5 billion and owns shares of airlines including Delta and United Continental Holdings Inc.

While the newly formed American Airlines Group Inc. also could find Alaska and its Seattle hub appealing, it’s unlikely to consider a deal anytime soon as it digests the recent merger, Downey said.

Trebor Banstetter, a spokesman for Atlanta-based Delta, and Ed Stewart, a spokesman for Fort Worth, Texas-based American with FleishmanHillard, declined to comment when asked if their companies would want to buy Alaska.

With Alaska’s professed interest in staying independent, a buyer would probably be forced to offer a higher premium to win over the board, said Savanthi Syth, an analyst at Raymond James Financial Inc.

The airline doesn’t need to sell after its stock rose more than fourfold in the last four years, Keay said.

‘Spinning Top’

“I view Alaska as a spinning top,” he said in a phone interview. “Their execution, their customer satisfaction, their labor relations are all really just humming along nicely. Any airline that would try to acquire it would probably just mess it up, trying to pick up that spinning top.”

Even so, buyers willing to take the plunge now would be able to take advantage of Alaska’s attractive valuation relative to peers, said James of James Investment.

Its enterprise value of $4.4 billion is 4.1 times its earnings before interest, taxes, depreciation and amortization in the last 12 months, compared with an industry median of 7.4 times, according to data compiled by Bloomberg.

“It’s just underappreciated and probably has further to go,” James said. “Do I think it’s an attractive target? Probably. It would not surprise me to see something like that happen.”

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