Speculating on the outcome of mergers and acquisitions (M&A) activities can be incredibly profitable, particularly when investing in a company before a deal is announced. This stage often carries the greatest uncertainty, as there is no guarantee that a deal will be agreed upon.
However, once a deal is announced, the gap between the current share price and the buyout price tends to narrow significantly, leaving little upside beyond a small margin that reflects the time value of money and the probability that the deal may fall through.
Occasionally, the market believes that a deal will collapse, creating a significant gap between the trading price and the agreed-upon buyout price. A notable example of this is the ongoing situation between Alaska Air Group (ALK) and Hawaiian Holdings.
In December of last year, Alaska Air Group agreed to acquire Hawaiian Holdings in an all-cash deal valued at $18 per share. Despite this, Hawaiian Holdings’ shares are currently trading at $12.64, suggesting a spread of 42.4%, which represents a substantial potential upside if the deal goes through. However, significant risks remain.
Current Situation and Potential Upside
If the market believed the transaction between Alaska Air Group and Hawaiian Holdings was highly probable, Hawaiian Holdings’ shares would be trading closer to the $18 per share buyout price. However, the current price of $12.64 reflects skepticism about the deal’s completion.
There are positive signs, such as Hawaiian Holdings’ shareholders voting in favor of the merger. However, regulatory hurdles present significant challenges.
The merger could potentially increase annual EBITDA for the combined business by about $235 million, with most of this growth coming from new revenue opportunities rather than cost-cutting measures.
The merger would position Alaska Air Group as a significant player, particularly in markets like Hawaii and Seattle, where the combined company would control 51% and 58% of air traffic, respectively.
Regulatory Hurdles
Despite the potential benefits, the merger faces substantial regulatory scrutiny. The U.S. Department of Justice (DOJ) is investigating whether the transaction would violate antitrust laws by reducing competition and harming consumers.
This scrutiny is similar to what was seen in the blocked merger between Spirit Airlines (SAVE) and JetBlue Airways (JBLU) earlier this year, where concerns about market consolidation led to the deal being scuttled despite efforts to appease regulators.
In late March, Alaska Air Group and Hawaiian Holdings entered into a timing agreement with the DOJ, agreeing not to consummate the merger before 90 days following substantial compliance with the DOJ’s latest information request. This timeline suggests that a final decision might be expected around early August.
Despite some positive developments, including the companies certifying substantial compliance in early May, the risk of regulatory pushback remains high.
Financial Performance and Risks
Looking at Hawaiian Holdings’ financial performance, the company has shown mixed results. Revenue increased in the past two fiscal years, but profits and cash flows have deteriorated. In the first quarter of this year, the company’s financial performance continued to show strain.
Core costs such as labor, fuel, maintenance, and servicing have increased slightly year-over-year, indicating challenges in maintaining profitability.
Hawaiian Holdings’ guidance for this year suggests further challenges, with anticipated increases in available seat miles and higher fuel costs contributing to elevated cost projections.
Additionally, the company’s net debt has grown significantly, from $338.9 million at the end of 2022 to $837.9 million in the first quarter of this year, increasing the financial risk and making the company less attractive to potential acquirers.
Market Dynamics
Despite some positive industry trends, such as rising enplanements, the broader market conditions present challenges. Airline fares have decreased year-over-year, which, combined with rising costs, creates an unfavorable economic environment for airlines. This mismatch between revenue and costs could further pressure Hawaiian Holdings’ financial performance.
Key Takeaways
The potential outcome of the merger between Hawaiian Holdings and Alaska Air Group remains uncertain. If the deal is completed, shareholders of Hawaiian Holdings could see significant upside. However, regulatory hurdles and the company’s financial challenges present substantial risks.
The current share price reflects skepticism about the deal’s completion, and if the merger falls through, Hawaiian Holdings’ stock could plummet, potentially losing over 60% of its value.
Given the binary nature of this situation, investors should tread cautiously. The regulatory risks and potential financial downsides make this a high-risk investment.
While there is potential for significant gains if the merger is approved, the substantial risks involved suggest that investors should be wary and consider the potential for a significant loss if the deal does not proceed.
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Faith is an enthusiastic freelancer and regular contributor to numerous finance blogs, creating valuable pieces to educate individuals on finance and fintech options. As a skilled writer, Faith has created content for diverse industries—if it exists, she’s likely written about it!
