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AAMRQ-AAL final conversion formula and equity distribution plan explained

December 10, 2013

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:

http://hiepsfinance.com/2013/05/14/the-impact-of-the-american-airlines-us-airways-merger-on-american-airlines-stock-a-curious-case-of-stock-piggy-backing/

http://hiepsfinance.com/2013/07/20/follow-up-on-aamrq-stock-price-analysis/

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:

http://hiepsfinance.com/2013/12/06/hieps-finance-s-final-formula-for-aamrq-lcc-conversion/

I hope that answered some questions.

Best,

Richard (Hiep Tran)

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28 Comments
  1. Lisa permalink

    Hi, I find your information on this topic extremely helpful! Do you have a formula for us to figure out what the 30, 60, 90, and 120 day distribution of stock, might be based on the information that is now out there? Thanks!

    • Hi Lisa,

      I do not have a formula for the distribution, and I’m not too interested in researching this topic because there is nothing people can do at this point. It is no longer possible to buy or sell AAMRQ.

      • mexicanfoodfreak permalink

        Hi Richard,

        Thanks again for providing some of the best analysis of the AAMRQ/LCC merger. It is not entirely true to say there is nothing people can do at this point because it is no longer possible to buy or sell AAMRQ. I am planning to buy puts on AAL as an insurance policy to protect against a large decline in the price of AAL over the next 120 days.

        In addition to your posts, I have found valuable information on this merger posted on a dallas news business blog by Terry Maxon. He posted a link to an analysis by Homer Parkhill, Managing Director of Rothschild Inc. His November 2013 analysis based on a “maximum liabilities assumption” and a $26 share price for AAL produces an estimate of $6.02 billion available to AAMRQ equity interests, while his “current liabilities assumption” and a $26 share price for AAL produces an estimate of $6.804 billion available to AAMRQ equity interests.

        http://aviationblog.dallasnews.com/2013/12/we-have-a-lot-of-upset-owners-of-aamrq-stock.html/

        http://aviationblog.dallasnews.com/files/2013/12/Homer-Parkhill-Rothschild-Nov.-22-2013.pdf

        Richard Hiep’s Final Formula: AAMRQ = (AAL x 544.4 – 8,000)/335.5 = 26 x 1.623 – $23.85 = $18.35/share

        Homer Parkhill current liabilities estimates at AAL = $26:
        $6804 million/ 394.2 million shrs = $17.26
        $6804 million/ 335.5 million shrs = $20.28

      • Hi mexicanfoodfreak,

        Good point. I wasn’t thinking of options trading when I made that statement. Regarding the analysis from Homer Parkhill, I do not know enough about the nature of the claims to comment on the accuracy of the formulas. That said, since the range contains my estimate, it is probably not too far off.

  2. Great series on this merger. Could you let me know if I have this straight:

    Your initial formula for the conversion of AAMRQ stock still holds true, but it will be extrapolated over the 120-day period. Each individual distribution will be dependent on the value of AAL (no longer LCC) at the 30, 60, 90, and 120 days marks? So essentially, if AAL theoretically held constant at 25 for the next 120 days AAMRQ holders will receive (25*544.4-8000)/394.2= $14.23 per share?

    • Thanks, Pete. If you want to rely on the $8 billion claims figure, you should use 335.5 million shares which do not include the shares converted from convertible notes right before the final hours of AAMRQ trading. To use the fully diluted shares figure you should subtract the converted notes from the claims. But you got the reasoning right.

      This may be my last post dedicated to the merger. There is no point in discussing the merger except for hindsight; at this point AAMRQ has been cancelled and the merger has closed. What will be will be.

      • Alright, thank you!

      • Carl permalink

        So if I still “own” LCC stock, do I lose my investment?

      • Pete: you’re welcome!

        Carl: all LCC shares should have been converted. I don’t know why you can still have LCC stock. Care to elaborate?

    • Fred wali permalink

      Hello,
      Thank you very much for sharing this info with us. But,I would love to know what the rest of distribution would be for 60 days,90 days and 120 days
      I would be very appreciative if you provide me this information.
      Thank you,
      Fred

      • Fred,

        I have stopped following this case for a while. I’m sure somewhere on the internet people have been talking about the distribution plan; hopefully you can find some good information on there.

        Best,
        Richard

  3. john permalink

    This is all too confusing for me. I want to know if it was a good idea for me to hold onto my 4000 shares of AAMRQ or should I have sold it before merger day? As I understand it..my +-$46,000 value has been diluted to roughly $5600. I don’t think this is right because there are more conversions at 30, 60, 90 and 120 days. However, will I ever come close to my AAMRQ value again with the new AAL stock.

    • Hi John,

      As mentioned, how much value you get out of the AAMRQ shares depends on the AAL price during the distribution period. I suggest you read my other blog posts on this case to better understand the situation and come back with specific questions.

  4. Carl permalink

    So my LCC stock was converted to AAL stock? If I owned LCC and didnt trade/sell etc before the merger, I know own AAL stock? I trade through ETRADE and I dont see anything on my account

    • Correct. Etrade should credit your account with AAL shares soon. I use Scottrade and had my LCC shares automatically converted to AAL last Monday.

  5. mexicanfoodfreak permalink

    Hi Richard and everyone concerned about AAMRQ potential distributions

    The total number of shares of AAL to be issued has already been set at 756,060,441 (544,361,824 available to stakeholders of AAMRQ). JP Morgan analyst Jamie Baker reported the distributions will occur in four equal installments (1/8, 2/7, 3/9 and 4/8). Richard’s methodology is still valid, but each distribution will be based on a volume weighted average price (VWAP) for the 5 previous trading days. As I understand it, 136,090,456 shares should be distributed each time, with creditors getting a number of shares calculated by dividing 1/4 of the outstanding debt by the 5 day VWAP. Shareholders of AAMRQ get the leftovers, which should be substantial at current prices. However, a sharp decline in the share price of AAL before and thru 1/8/14 would result in less shares being distributed to AAMRQ equity owners. Those of us who chose not to sell our shares of AAMRQ prior to 12/6/2013 could be in for a wild roller coaster ride until 4/8/14. Hopefully everyone doesn’t try to sell their newly distributed shares a day or two after receiving them.

    ————————————————————————————————————-

    Sources

    The quoted material below came from page 4 of the 21 February 2013 JP Morgan analysis of LCC and AAMRQ by Jamie Baker. Richard provided a link to it in his first post on the merger on May 14, 2013. (https://markets.jpmorgan.com/research/EmailPubServlet?action=open&hashcode=-khht4o7&doc=GPS-1058079-0)

    “Note that equity distribution is expected to begin as of the effective date of the plan
    of reorganization, which we estimate to be early Autumn. Distribution will occur in four equal installments (FOUR EQUAL INSTALLMENTS, repeated for emphasis), the 30th, 60th, 90th and 120th day after the effective date.

    But here’s the kicker. Should LCC’s share price be sustained above $15.00 for the
    duration of distribution, incremental deal value flows disproportionately to holders of
    AAMRQ, for the simple reason that conventional creditors can’t receive more than
    par + accrued. Please note, LCC’s share price (in turn determining the value that
    accrues to AAMRQ) will be based on the VWAP over the five days leading up to
    each distribution. (Hence our frequent use of the term “sustained”, as LCC’s VWAP
    will be measured on each of the four distribution dates).”

    http://aviationblog.dallasnews.com/files/2013/12/Homer-Parkhill-Rothschild-Nov.-22-2013.pdf

    Analysis including charts of the expected equity distribution based on share price points of AAL (assumes stock price is constant over 120 day distribution period). Rothschild, Inc. was hired by old American Airlines to prepare this analysis for bankruptcy court proceedings.

    • Hi mexicanfoodfreak,

      Great job digging into the sources! In my view, the fluctuation in the number of shares distributed in he next few months is no difference from the fluctuation in AAMRQ price before the merger closed. Nothing is guaranteed until the shares get distributed, and AAMRQ remains a highly leveraged stock even in its afterlife. ;)

  6. Son Pham permalink

    Hello Hiep,

    Thank you much for your logical explanations and calculations on the estimated worth of AAMRQ.

    Assume your formulas will be close to the reality for 30, 60, 90 and 120 days of AAL prices then the holders of these AAMRQ will received the cash or AAL stock quantities equivalent to the amounts ? If in cash, where AAL can draw billions from ? If they will receive in AAL stocks then your formula can be translated to the estimated number of AAL for each AAMRQ based on certain AAL price.
    Thank you for your work and advice.

    Son Pham

    • Hello Son,

      AAMRQ holders will receive an equivalent number of AAL shares. You are correct; the dollar value in my formula can be easily translated into the number of shares. I’ll leave that to the curious minds; my original formula was to determine whether one should buy AAMRQ shares; anything that happens after the merger closes isn’t relevant; whether you bought AAMRQ or you didn’t! ;)

      • Son Pham permalink

        Hello Hiep,

        I like your work especially at the confused moment when my broker accounts on AAMRQ experiences more than $100k less due to the conversion just on one day, Dec 9. It caused a distressed feeling. Your formulas gave me a lift of hope and shed light on the positive side.
        Bravo to your work, Hiep.

        Son

  7. My pleasure. Good luck with the distribution period. Looks like your portfolio is gaining back the loss and then some ;)

    • Nick Boulahanis permalink

      Hey I am a aamrq shareholder and I haven’t seen any change since the distribution that was suppose to be the 8 th of this month . Why is that if you don’t mind me asking ?

      • Son Pham permalink

        I checked my account on Feb 10 and but saw only the number of AAL in my account but i have to click on the history statement for this stock and check the dates with the numbers of AAL shares credited to my account. I have 2 accounts and both of them show the shares accordingly. So in the historical statement you also can see the numbers of shares credited to you on Dec 9, February 10 and perhaps the next 3 more months… Good luck.

    • Son Pham permalink

      I just received in my broker account today for the first distribution. It is over 1,410 AAL share or over $41K at today price $29.62. It is added to about 710 AAL shares in the guaranty at 3.5% initial distribution. According to their schedules there will be 3 distributions left, on Feb 10, Mar 10 and Apr 10. Based on the current AAL price trend, it would be nice.
      Do you know any other company like AAMRQ to invest ? I read somewhere the Overseas Shipping co being in the similar to that.
      Son

      • mexicanfoodfreak permalink

        As Richard has mentioned in past postings, you should be aware that many bankruptcy proceedings result in the equity holders (stock owners) left holding worthless shares of old stock and no ownership of shares of stock in the “new” firm that emerges from bankruptcy. I know owners of Eastman Kodak (EK) stock prior to their bankruptcy reorganization did not receive any shares or the new Eastman Kodak (KODK) that emerged from bankruptcy. I have been told by various sources that shareholders of General Motors, Delta Airlines and United Airlines were all wiped out in the bankruptcy proceedings .Overseas Shipholding Group, Inc (OSGIQ) has a market cap to $198.1 million and an enterprise value of $2.2 billion (debt is 10x market cap). Debt to equity is listed as 684.56. Only 71,488 shares were traded today, with a 10 day average volume of 303,926 shares. I am not even close to an expert on the shipping industry, but competition and the global recession have driven shipping rates down. I foolishly bought 200 shares of Nordic American Tankers Limited, Inc (NAT) early in 2013 based on a recommendation from Jim Cramer and a prediction of a turnaround in shipping rates. I was able to get out with a relatively small loss after the recent increase in its stock price. They keep issuing new shares to raise money.

        Without some concrete analysis and specific reference to a bankruptcy reorganization plan that would preserve some shareholder equity, I would stay away from this one.

      • Son Pham permalink

        I am glad to know more about Overseas Shipping after reading your materials. So I will stay away from it. Thanks

  8. Nick permalink

    Q, Thanks for all the complicated math. For a simple mind, if one owned 500 shares of AAMR, how many shares of AAL will they get after all conversions over 120 days are completed (presume AAL will be 25)?

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