Should AA have taken British Airways Buy Out?????


#1

A report on BusinessWeek’s Web site said AMR could be a buyout target of group including Goldman Sachs /quotes/zigman/188479/quotes/nls/gs GS -0.02% and British Airways /quotes/zigman/1532741/quotes/nls/bab BAB -0.31% /quotes/zigman/3670411 UK:IAG -1.21% . The news story cited unnamed sources familiar with the matter.

The deal valued AMR at between $46 and $52 a share, according to the report. The shares climbed 2.4% to close at $38.97.

“While anything is possible in this high-liquidity world of private equity, we’re skeptical that this story has merit,” Morgan Stanley analyst William Greene wrote in a research note.

U.S. law limits foreign ownership of domestic airlines to no more than 25%, casting doubt on whether the bid could proceed, especially if British Airways managers were to run the private airline after a leveraged buyout.

AMR
American is the No.1 U.S. airline, with a near 16% domestic market share, according to Department of Transportation data.

“Aside from the already high leverage, size of the company, legal constraints and significant business risk, our LBO math suggests that the potential [return] from an LBO is just barely higher than 15%, if AMR spends little on a fleet renewal,” Greene wrote.

“With American Airlines as the largest U.S. Heathrow operator, we agree that such a deal might be attractive to British Airways,” according to Prudential analyst Bob McAdoo. “But with Virgin’s difficulties getting through the process of starting a U.S. airline, we doubt an AMR-British deal would win approval.”

Private equity groups might be eyeing airlines, but an AMR buyout is unlikely, given its large debt load – having not gone through bankruptcy - and its plans to replace more than 300 MD-80 aircraft that are approaching 30 years of age, McAdoo said.

“United, with a cleaner balance sheet, and a management team that seems more ready to sell the company, would be a more likely candidate. United also would likely be a difficult deal for a tie up with British Airways,” McAdoo wrote in a note to investors


#2

The only thing that could possibly is that BAW buys a small stake into AMR. And as you mentioned, it can not be more than 25%. This is the same issue that regulators had with Branson when VRD started up. Virgin was the parent company of the whole lot (VIR, VAU, VOZ, Pacific Blue, Virgin Nigeria, Virgin Sun, etc.) and because he isn’t a US Citizen, could not own the major stake in the airline. So it was sold off to who runs it now, with his near 25% stake in it.

But as far as a “buyout” in the full sense of the word? Not going to happen.

BL.