DEL.ICIO.USDifferent calculation methods yield different numbers
The Atlanta Journal-Constitution
Published on: 05/02/08
What's the planned merger of Delta and Northwest really worth?
It's a simple question. But — once you ask a bunch of business and academic experts — it has lots of answers.
There are different ways to estimate the value of companies and mergers of companies, depending on whether they're trying to take over a target firm, issue new shares to investors or decide whether the companies' securities should be part of a pension portfolio. And, since they're often based on estimates of asset values, future profit projections and the vagaries of the stock market, there's plenty of room for disagreement.
Also, airlines' stocks have plunged since the Delta-Northwest deal was announced last month amid investor gloom about the economy and skyrocketing jet fuel prices. That already has erased billions of dollars from some estimates of the value of the planned merger.
"All those numbers are exceedingly approximate because the market is in turmoil," said Roger King, airline industry analyst with CreditSights, a securities advisory firm.
"Right now they're all problematic because fuel is 40 percent of [the airlines'] costs and it goes up and down $2 and $3 [per barrel] a day."
That said, here's a sampling of the different ways to say how much the Delta-Northwest combination, which was announced on April 14, would be worth:
MARKET CAPITALIZATION
This is the value that Wall Street puts on each company daily. The so-called "market cap" of the merger equals the total number of Delta shares multiplied times the value of each share, plus the similar result for Northwest's shares.
However, companies usually pay a premium over the stock market value to buy control of another company. In the case of Delta and Northwest's proposed merger, Northwest shareholders will get 1.25 shares in the new company for each share that Delta's investors get, which worked out to about a 17 percent premium when the deal was announced.
Here are the values of the proposed merger in terms of market capitalization when it was announced, and now:
Value on April 14:
• 395 million Delta shares x $10.48 = $4.1 billion plus
• 262 million Northwest shares x $11.22 = $2.9 billion
• Total: $7.1 billion (rounded to nearest tenth)
Value now:
• 395 million Delta shares x $8.83 = $3.5 billion plus
• 262 million Northwest shares x $10.16 = $2.7 billion
• Total: $6.2 billion
ENTERPRISE VALUE
This is the approach Delta and Northwest used when they announced the merged company would be worth $17.7 billion. It's the theoretical takeover price, and it is based on the idea that an acquiring company would assume the takeover company's debt and keep any cash in its accounts.
Generally speaking, it equals the sum of the firms' market capitalizations [equity value] plus their debt, minus the cash or short-term investments they own.
"That is what you have to pay," said King, the CreditSights analyst, but it doesn't necessarily indicate what is a good deal and what isn't. King said it's like deciding whether to marry one person with a paid-off house and a big bank account, or another person with little savings, a big mortgage and lots of credit card debt. Even though the two potential marriage partners have radically different financial situations, they both could have the same enterprise value, he said. "But who's the better deal?"
Some experts also quibble over calculation details, such as whether to count long-term aircraft leases or underfunded pensions as part of the merged firms' debt, or whether to deduct all of the cash. Such details can add up to big differences in estimated values. Here is Delta's estimate, based on stock values a few days before the deal was announced:
• Equity value of Delta + Northwest: $7.5 billion
• Add adjusted net debt: $16.1 billion
• Subtract unrestricted cash and short-term investments: $5.8 billion
• Total enterprise value: $17.7 billion (when rounded to the nearest tenth)
Merrill Lynch analyst Michael Linenberg recently came up with a significantly higher enterprise value, mostly because he included the value of long-term aircraft leases as another long-term obligation:
• Delta: $3.7 billion equity + $9 billion debt + $5.3 billion leases - $3.3 billion cash = $14.7 billion
• Northwest: $2.8 billion equity + $7.1 billion debt + $4.6 billion leases - $3.8 billion cash = $10.7 billion
• Total: $25.4 billion
Value now (using Delta's method)
• Delta: $3.5 billion equity + $9 billion debt - $3.3 billion cash = $9.2 billion
• Northwest: $2.7 billion equity + $7.1 billion debt - $3.7 billion cash = $6.1 billion
• Total enterprise value: $15.3 billion
DISCOUNTED CASH FLOW VALUATION
Finally, there are several approaches to valuing companies or merger deals that involve estimating how much cash the operation will generate over time. Such calculations try to take into account how much new revenues the merged companies will capture, and savings they get from eliminating redundant operations and jobs.
The formulas also adjust the value for when those so-called "synergies" materialize, to allow for the fact that most investors would rather see the companies making a $1 billion profit next year than five years from now.
"It is probably the most common measurement for valuing public and private companies used by investment bankers," said The Motley Fool on its Web site.
But none of the airline analysts and other experts contacted provided such an estimate. Delta, which expects to get $1 billion in annual synergies from the merger, did not disclose its values for the merger using this method.
"We did this analysis," Delta spokesman Kent Landers said in an e-mailed message, "but because it's based on our proprietary models, it's not something we can share publicly."
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