Odds of AMR Merger Becoming Far More Favorable Again

The controversial and pending merger of AMR Corp. (OTC Markets: AAMRQ) and US Airways Group, Inc. (NYSE: LCC) is looking more and more likely again. What has happened under the government shutdown is that the government’s attempt to delay the hearing has not worked and a federal judge expressed a more favorable view than the initial suit from the Department of Justice suggested.

Just last week we saw that a firm called Wolfe Research reinstated coverage of AMR with an Outperform stock rating. This firm also assigned an $11 price target, which implies more than 100% upside to shares of AMR.

What we have been tracking is that AMR’s price fell rapidly in August, from almost $6 to $3.17 in one day in early August. Shares even went as low as $2.75. But the shares recovered to $5.22.

US Air shares fell at the same time as AMR’s from almost $19 down to $16.36 in one day and these ultimately went as low as under $15.50. US Air share are now back over $20. One matter that also helped US Air shares in recent weeks was that JPMorgan raised its rating to Overweight from Neutral in mid-September.

As you can tell, this merger is more important to AMR than it is to US Air. After all, AMR is the one trying to exit bankruptcy. Both airlines can function on a standalone basis going forward. There are also supposedly only twelve overlapping routes that the DOJ can really point to and AMR could offer up gate space in Washington DC and other markets as a concession.

This merger is still far from a done deal, but it is looking more and more like it will be allowed to continue in some form even if it takes much longer to come to fruition. That being said, there also appears to be more event risk again for AMR than there is event-driven upside if the deal is called off entirely.

We still think JetBlue Airways Corp. (NASDAQ: JBLU) could be the lucky stand-in marriage partner to one of these airlines if the deal is ultimately blocked. JetBlue is nominally very affordable as its market cap is only worth almost $2 billion, and at $6.85 its 52-week range is $4.80 to $7.28.

The AMR and US Air is looking less risky again, and JetBlue may be an alternate route even if that larger merger is still ultimately blocked.

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