A Bittersweet Moment for Richard Branson as ​Virgin America Sells to Alaska Air Group

Henry Truc  |

"If you want to be a Millionaire, start with a billion dollars and launch a new airline." - Richard Branson

That’s one of the most oft-quoted quips from Virgin America (VA) Founder Richard Branson, who reluctantly sold his startup airline to Alaska Air Group (ALK) on Monday for $4 billion. The deal, which breaks down to about $2.6 billion in cash and the rest in debt and aircraft lease obligations to be assumed by Alaska, sent shares of Virgin America soaring over 40%, to as high as $55.43 when it was announced. Shares of Alaska dipped by as much as 6% on the day to $77.01.

If and when the merger is completed, it would propel Alaska to become the fifth-largest airline in the US, surpassing JetBlue (JBLU), which was also aggressively pursuing Virgin America as an acquisition. Shares of JetBlue fell by nearly 5% on the news.

Considering that Virgin America IPO’d in 2014 at $23 a share, Branson’s Virgin Group walks away with a nice return on their airline venture, more than doubling the return of its roughly 25% stake. Still, the business tycoon couldn’t help but express a bit of remorse for the nine-year-old renegade airline’s merger. In a post on the Virgin website, Branson reflected on the history of the airline and his feelings of the deal.

“I would be lying if I didn’t admit sadness that our wonderful airline is merging with another. Because I'm not American, the US Department of Transportation stipulated I take some of my shares in Virgin America as non-voting shares, reducing my influence over any takeover. So there was sadly nothing I could do to stop it.”

While Branson’s VX Holdings owned about a quarter of the airline, only 18% were in voting shares because of the rules.

For Alaska, while the purchase price is widely seen as a significant overpay, it does result in creating one of the most formidable airlines on the West Coast, combining Alaska’s stronghold of the Northwest with Virgin America’s foothold in California. The deal is also expected to generate about $255 million in annual cost savings.

More importantly, with 80% of the North American airline market locked up by the big four—American (AAL), Delta (DAL), Southwest (LUV), and United (UAL)–the move may have been more about long-term survival than anything else. The recent bankruptcy of Republic Airways is one obvious example of how hard it is out there right now for the smaller guys in the industry.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

Companies

Symbol Name Price Change % Volume
UAL United Airlines Holdings Inc. 77.87 -4.03 -4.92 6,369,037 Trade
DAL Delta Air Lines Inc. 56.83 -1.98 -3.36 8,632,098 Trade
ALK Alaska Air Group Inc. 65.09 -1.64 -2.45 1,029,516 Trade
LUV Southwest Airlines Company 56.10 -0.46 -0.80 6,023,642 Trade
JBLU JetBlue Airways Corporation 20.06 -0.59 -2.86 5,288,163 Trade
AAL American Airlines Group Inc. 25.94 -1.70 -6.15 17,481,675 Trade
VA Virgin America Inc. n/a n/a n/a 0 Trade

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