As you know, this summer I wrote two blog posts on the AMR Corporation and US Airways Group merger to explain how it affects AAMRQ stock price. Using the information available at that time I derived a formula to estimate AAMRQ stock price based on LCC stock price:
I know I mentioned that I would write more about the AAMRQ stock case if there was a huge surprise. And there was a huge surprise when the Department of Justice filed an antitrust lawsuit against AMR Corporation and US Airways Group, but this happened when I was entangled with a few life issues, so I had to skip.
Not to say that I am much less busy now, but I thought this case deserves another mention. Caution: math abound ;)
So, as we know, AMR Corp and US Airways Group have officially merged, and as prescribed, both AAMRQ and LCC have been cancelled. Now there is only one stock: AAL, for American Airlines Group.
All LCC shares have been converted to AAL shares at a 1:1 ratio – no surprise here.
So what about AAMRQ shareholders? Here is where it gets interesting.
As many of you have read, AAMRQ shareholders were promised a 3.5% stake in AAL, and that is all that is guaranteed by the merger’s provisions. Let us see how the AAMRQ-AAL conversion works with this:
Total AAL fully diluted shares: 756.1 million
Total AAL market cap: 756.1*LCC
3.5% AAL market cap: 3.5%*756.1*LCC
Total AAMRQ diluted shares outstanding: 394.2 million (http://www.sec.gov/Archives/edgar/data/4515/000119312513466914/d640288d8k.htm)
Each AAMRQ share is worth: AAMRQ = 3.5%*756.1*LCC/394.2 = 0.067*LCC
0.067 comes pretty darn close to the 0.0665 ratio that AMR Corporation published, so I am not going to bother checking the rounding.
It doesn’t take a lot of math to figure out that this conversion doesn’t come anywhere near the final formula I provided on Friday: http://hiepsfinance.com/2013/12/06/hieps-finance-s-final-formula-for-aamrq-lcc-conversion/
Where does the rest of the AAL equity for AAMRQ shareholders go? Glad you asked.
The rest of the equity is distributed over the next 120 days. The amount of equity distributed depends on the actual claims amount as well as the price of AAL during the distribution period. Yes, another share determination period. The final closing price of AAMRQ and LCC only determined the initial distribution of the 3.5% of AAL equity.
To the math geeks out there: did you notice what number I used that’s different from the one in previous formulas? Yes, the number of AAMRQ shares. It used to be 335.5 million, didn’t it?
Let’s refer back to the SEC link I provided above and read the conversion election section. Apparently some claimholders of convertible notes converted the notes to shares. This has 2 effects on AAMRQ share determination. First, it increases the number of AAMRQ shares to factor in the formula: 394.2 million vs 335.5 million. Second, it decreases the amount of claims by about half a billion dollars. The combined impact should be minimal on the total conversion formula. That explains my final conversion formula as posted here:
I hope that answered some questions.
Richard (Hiep Tran)