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Alaska-Hawaiian Airlines Merger Makes Sense. Why the Stock Market Hates the Deal.

Alaska Air stock picked up two downgrades after announcing a deal to buy Hawaiian Holdings.

Daniel Slim/AFP/Getty Images

Alaska Air Group
‘s surprise $1.9 billion deal to buy
Hawaiian Holdings
had investors rushing for the emergency exit—and its stock in free fall. Some on Wall Street are also taking evasive action but others are staying on board.

The shares picked up downgrades from Deutsche Bank and Raymond James analysts—both were bullish before the agreement was announced. Yet others, including J.P. Morgan and Seaport Research stuck to Buy ratings.

The consensus among investors has been less ambiguous. Alaska stock tumbled more than 14% Monday as shareholders digested the carrier’s proposed tie-up with Hawaiian Airlines’ parent company for a hefty 270% premium. The shares edged higher ahead of the open Tuesday.

Hawaiian stock, which soared 193% Monday, has been under pressure for much of 2023 as engine problems and the Maui wildfires hit earnings. Intense competition from
Southwest Airlines
in the Hawaiian market has also been a factor.

Despite all of that, Wall Street appears to be generally in agreement that the deal makes sense strategically, or at least in the long term—-even those downgrading the stock said so.

“We believe this acquisition makes sense longer term and Alaska has the balance sheet and earnings strength to see it through,” Raymond James analyst Savanthi Syth said. “However, given the current macro uncertainty, the complexity of executing the merger should weigh on sentiment and likely limits the near-to-medium term upside case,” she added as she downgraded the stock from Strong Buy to Market Perform.

Deutsche Bank’s Michael Linenberg took a similar view in downgrading the stock to Hold from Buy. While believing in the merits of the merger and long-term value creation for shareholders, he expects the stock to underperform the sector in the near-term “as a strong fundamental investment story is overshadowed by deal-related risks and issues.” He lowered his target price on Alaska to $44 from $55.

One key benefit of the deal is that Alaska would have access to Hawaii, one of the 25 biggest U.S. markets. The Hawaiian market is worth $8 billion in annual revenue and Alaska CEO Ben Minicucci said the combined company would have more than $4 billion of that.

J.P. Morgan analyst Jamie Baker said the merger “appears to solve Alaska’s uncertain growth trajectory.” He, too, thinks the deal “makes sense”, sticking to an Overweight rating in a note Monday.

Another, perhaps underappreciated, factor to consider is Hawaiian’s agreement with
to operate cargo flights for the tech conglomerate. Seaport Research’s Daniel McKenzie said the deal would “catapult Alaska into international widebody flying and turbo-charge its cargo business.” He rates the stock Buy, with a price target of $48.

“Alaska would walk away with a stronger, more diversified, network, positioning it to compete more effectively against the Big 4,” he added.

There is a regulatory risk to the deal, and a pretty big one at that. The Justice Department has shown an appetite to tackle airline mergers and alliances under President Biden. The DOJ has taken the proposed
JetBlue Airways
Spirit Airlines
merger to court, while also forcing the former to abandon its alliance with
American Airlines
in the Northeast.

Alaska and Hawaiian overlap on just 12 of the 14,000 flights they operate but the DOJ could still find reasons to sue to block the merger.

Perversely that would give Alaska stock a near-term boost, even if Wall Street thinks the deal is a long-term winner.

Write to Callum Keown at callum.keown@barrons.com

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