Wednesday, December 20, 2006

Delta Air Lines + Scripophily = $1.38 per share

Delta Air Lines Inc. (DALRQ-$1.38) announced today that its Board of Directors, with the full support of the Company’s management team, formally rejected the unsolicited $8.6 billion bid by rival U.S. Airways Group (LCC-$57.50) and publicly presented its own reorganization proposal.

The Board concluded that Delta’s
stand-alone plan would provide the Company’s creditors with superior value and greater certainty on a much faster timetable.

In a valuation analysis prepared by Delta’s financial advisor, The Blackstone Group, creditors would retain consolidated equity worth between $9.4 billion to $12.0 billion. These values would result in a recovery for Delta’s unsecured creditors of about 63 cents to 80 cents of each dollar in their allowed claims (via distributions of new Delta common stock).

In addition, the Company said that the
U.S. Airways proposal was structurally flawed and could not be executed as claimed by U.S. Airways because of erroneous economic assumptions, higher debt-loads (needed to fund the merger), and, labor and antitrust issues. Insurmountable hurdles to the U.S. Airways deal include, but are not limited to the following:

  1. The flawed economic assumptions underpinning the “synergies” in the US Airways proposal would result in vastly lower value than claimed by US Airways.
  2. The combined company would have the highest total debt load in the airline industry -approximately $23 billion - seriously limiting its financial flexibility and ability to withstand the volatility of the airline industry (and would force the new entity to cut some 10,000 jobs).
  3. There are overwhelming labor issues that would preclude the combination from attaining the claimed synergies. The Delta unit of the Air Line Pilots Association, the union representing Delta’s more than 6,000 pilots, has said - and Delta agrees - that Delta’s pilot contract (which runs from June 1,2006 – December 31, 2009) would prohibit the combined company from implementing capacity reductions that US Airways asserts are the economic foundation of the proposed transaction.
  4. The transaction is not likely to receive antitrust clearance from regulators because it would result in loss of competition, thereby, negatively impacting consumers and their communities: (i) The proposed merger would eliminate or reduce competition on thousands of domestic city pairs (origin and destination cities/airports), impacting millions of passengers per year; (ii) the combined entity would operate 52% of slots and 40% of gates at major East Coast airports; (iii) there would be no competitive low cost carrier presence (> 5% passenger share) at any of the 71 U.S. cities dominated by the merger; (iv) and, the deal would substantially reduce competition at Boston-Logan, New York-LaGuardia, and Washington-Reagan National airports (share position analysis based on passenger traffic); Ergo, city pair concentration and route dominance would lead to reduced competition, fewer discounted seats, and higher passenger fare levels—subjecting the US Airways proposal to a lengthy Department of Justice review process, during which Delta would be forced to remain in bankruptcy.

As of September 30, 2006, $20.9 billion in contractual obligations subject to compromise weighed on Delta’s balance sheet. Under the priority scheme established by the Bankruptcy Code, the ultimate recovery to shareowners is the last priority to recover (what is left in assets) after all creditors are satisfied under the filed plan or of reorganization. Given that the total shareholder deficit of Delta is approximately $13.9 billion—or about $(68.90) per share—the future giveback to shareholders does not look promising.

The Company intends to emerge from Chapter 11 in the spring of 2007. The Board of Directors have suggested that when the Company emerges from bankruptcy and issues new equity for its creditors that it will cancel its outstanding common stock currently trading.

The market price of a stock reflects what buyers are willing to pay—based on their evaluation of the Company’s value, cash flows, and future prospects.
Is it rational behavior for investors to pay $1.38 per share for worthless paper?

Might common stock owners might be speculating that the Bankruptcy court and/or Creditors Committee denies the current Debtor petition?—a history of reorganizations provides evidence contrary to this position.

We broached this question once before—in our November 8, 2006, posting on
Delphi Corp.

This second go-around, we are going to introduce a new supposition:
scripophily (pronounced scri-POPH-i-ly), which is the collecting of old stock and bond certificates. Values range from a few dollars to more than $100,000 (for the rarest)., the Internet's largest buyer and seller of collectible stock and bond certificates, grew sales 31 percent during the past 12 months ending October 31, 2006, compared with the prior year. CEO and Founder Bob Kerstein: “The increase in activity is primarily due to interest in the historical significance and beauty of stock and bond certificates as well as their relative scarcity.

Physical stock and bond certificates are a permanent history of capitalism representing a cross section of the financial markets we know today. Stock certificates are becoming an artifact of the past as the world becomes more digitized."

The supply of new certificates reaching the collector market has been substantially reduced due to recent changes in State Laws and Stock Exchanges Rules. Many companies are no longer required to issue physical stock and bond certificates.

As previously mentioned, come spring 2007, the existing stock will have no redeemable value, save as a collectable.
Might investors be scooping up Delta stock in hopes of profiting from the potential value of the underlying certificates to hobby enthusiasts?

Looking through’s online inventory, extant certificates of Allegheny Airlines (in 1979 it became US Air), Air Florida Systems (folded in July 1984), American West Airlines (operated in bankruptcy from 1991 to 1994), and Braniff Airways (filed Chapter 11 bankruptcy on June 1, 1982) were recently priced for sale at $139.95, $79.95, $99.95, and $79.95, respectively.

There are many factors that determine value of a certificate including condition, age, historical significance, signatures, rarity, demand for item, aesthetics, type of company, original face value, bankers associated with issuance, transfer stamps, cancellation markings, issued or unissued, printers, and type of engraving process.

“Delta is ready when you are.” –Advertising slogan. Maybe—But we are skeptical that is ready to buy thousands of soon-to-be worthless Delta stock certificates.

Editor David J Phillips does not hold financial interests in any of the companies mentioned in this posting. The 10Q Detective has a Full Disclosure policy.

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