US Airways will have to bridge a $1 billion divide in its pursuit of larger rival American Airlines.
US Airways will soon enter negotiations with creditors of American parent AMR Corp., which is trying to decide whether to merge with a rival or emerge from bankruptcy as an independent airline.
Under US Airways’ latest proposal, AMR creditors would get 70 percent of the combined airline, while US Airways shareholders would get 30 percent. AMR creditors think they should get 80 percent of the merged airline.
The difference between those figures works out to roughly $1 billion, based on a valuation of close to $10 billion for AMR, according to a source close to the talks.
After winning labor concessions from its pilots’ union, American will generate about $3.7 billion in earnings before interest, taxes, depreciation and amortization, or Ebitda, in 2013, the source said. That’s more than analysts’ expectations for $3 billion.
With airlines trading at about five times Ebitda, American would be valued at $18.5 billion. Back out the $8.5 billion in debt American will have on its books when it emerges from bankruptcy, and that leaves $10 billion worth of equity.
So the gap between US Airways’ proposed 70 percent bid and AMR creditors’ 80 percent ask works out to $1 billion — or 10 percent of $10 billion.
US Airways has indicated the 30 percent offer is a starting point and it is open to compromise, the source said. AMR creditors include Marc Lasry’s Avenue Capital, Marathon Asset Management and Pentwater Capital.
Creditors expect AMR’s value to rise partly because it will be able to greatly increase its use of smaller regional jets after restructuring its labor contracts.
Under the previous agreement, American was forced to use many more wide-body planes than its peers.
American and US Airways spokespeople both declined to comment.