2 months ago, I posted an article explaining the driving force behind the stock price movement of AMR Corporation, the mother company of American Airlines, since the American Airlines – US Airways merger was announced in February, 2013.
In light of the merger getting closer and closer and more detail being released, I wanted to write a quick follow-up on that popular post.
First off, how did my formula to determine AAMRQ stock price based on LCC stock price turn out to be? I have updated the chart tracking the price movement of these 2 stocks. See for yourself how close the AAMRQ estimate is to the actual.
If you recall, I based my formula: AAMRQ = LCC * 1.582 – 22.56 on several numbers provided by Jamie Baker from JP Morgan. While the number of shares outstanding is easy to confirm, the total claims from AMR Corporation’s creditors is hard to estimate. Apart from the $7.565 b figure from JP Morgan, I have not had much success finding a reliable estimate for the total amount of debt to be paid out to these creditors. According to Tulsa World, the amount is $7.68 b. http://www.tulsaworld.com/continuing/coverage.aspx/American_Airlines/34
Unfortunately I could not locate any document filed on April 16, 2013 that reports the quoted amount. My search on sec.gov wasn’t fruitful. If you have the time to go through http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000006201&type=&dateb=&owner=exclude&start=120&count=40 , feel free to give it a try.
I was about to give up when I recalled that a couple of weeks earlier AMR Corp had sent me a CD containing documents related to the merger case. As a stockholder, I get to vote on the deal – that’s why they sent me these documents. I still have a bunch of paperwork to file by July 27, 2013 which I suppose is the cutoff date for voting. Treasure hunting through thousands of pages led me to the official estimate from the proposed Plan of Reorganization. If you have the Disclosure Statement dated June 5, 2013, it’s on page 486 out of 510 pages. The estimate is $7.699 b. Under this assumption, my calculation has a little bit of revision:
AAMRQ=1.582*LCC – 22.96
The formula based on JP Morgan’s estimate was AAMRQ = 1.582*LCC – 22.56
So the revised formula gives AAMRQ a 40 cents lower price.
How significant is the difference? Well, 40 cents is quite a big deal given that AAMRQ price is in the $5-$6 range. However, the debt amounts from JP Morgan and AMR Corp are both estimates, and estimates are based on many assumptions, the most significant being how the claims will be settled and the market value of the claims at settlement date. Being a pension actuary, I am quite confident that the pension liability will be off, maybe way off, depending on the interest rate, the negotiation with the Pension Benefit Guaranty Corporation, and the timing of the plan participants’ retirement.
That said, however, given the uncertainties in the merger, I would rather be conservative with any AAMRQ purchase. Since the new estimate results in a lower AAMRQ stock price, I will pick this new estimate to evaluate AAMRQ.
AAMRQ=1.582*LCC – 22.96
I still find this stock valuation case interesting, and may write further on AAMRQ or LCC in the next couple of months, especially if some unforeseen event happens to the merger. But as of now, I have greater interest in Nokia, so you can expect more posts on this Finnish handset manufacturer.
Richard (Hiep Tran)