2. Case Questions
2
Case Questions
● What are the advantages and disadvantages of going public?
● What different approaches can be used to value JetBlue’s shares?
● At what price would you recommended that JetBlue offer its shares?
4. Background Overview
● In July 1999, David Neelman announced plan to launch a new airline that
would bring “humanity back to air travel.”
● Hired an impressive new management team
○ David Barger, COO, former vice president of Continental Airlines
○ John Owen, CFO, former executive vice president and treasurer of Southwest Airlines
● Strategy--”Fixing everything that sucked”
○ Point to point service
○ Lowest cost per available-seat-mile of any major US airlines in 2001--6.98¢
○ Safe, reliable, low-fare airline that was focused on customer service
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5. Background Overview
● Positioned in New York with 21 million potential customers in the
metropolitan area.
● In early 2002, operated 24 aircraft flying 108 flights per day to 17
destinations.
● Concerns
○ 87 new-airlines failures over the previous 20 years
○ 9.11, US airlines industry lost $7.7 billion in 2001
● Competitors
○ Southwest
○ Frontier
○ WestJet
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6. IPO Process
6In days
Underwriter selection meeting
“Quiet period” begins
108
0
15
45
Due diligence
Registration
(announcement) date
75
SECreviewperiod 99
100
50
60
Red herring
Road show
Letter of comment
received from SEC;
file amendments
Effective date
Public offering date
Settlement date
● The IPO process takes
approximately 3-4 months
● Hiring a bank or an underwriter to
guide the company through the
process
● Submit the documents to SEC
● Handing out the ‘Red Herring’ to
prospective investors
● Going out on Road Show to seek
interest in the IPO
● Finalizing the IPO
● Distributing the IPO Shares
7. Pros:
● Financial benefit in the form of raising capital
● Capital can be used to fund R&D, capital expenditure or even to pay off
existing debt.
● Increased public awareness of the company
Cons:
● More disclosures to the investors
● High cost incurred in complying with regulatory requirements
● Focus on short term results rather than long term growth due to added
pressure
IPO Advantages and Disadvantages
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8. Relationship between Offering Price and
Opening Price of an IPO
● IPO investors purchase the shares from the company at the offering price.
● The price at which the stock opens for trading is called the opening price.
● Depending on the interest from investors, the opening price can be higher
or lower than the offering price.
● If the opening price is higher, the IPO investors have an immediate gain; if
it is lower, they have an immediate loss.
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9. ● Initial price range for JetBlue after first roadshow: $22 - 24
● Management filed an increase in the IPO price: $25 - 26
● Pros for higher IPO price: If the opening price is higher than the offering price,
the company is able to generate higher capital from the IPO.
● Pros for lower IPO price: In some cases, when the opening price is too high,
the demand can be unsustainable and can lead to loss later on.
IPO Price: high or low?
9
10. ● Comparable companies’ multiples
○ Overall airlines’ multiples and low-fare airlines’ multiples
○ Total capital multiple, EBITDA multiple and EBIT multiple
● Discounted cash flow
○ Key assumptions
○ Scenario analysis
Valuation Approaches
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11. 11
Valuation Approaches - Comp multiple
(000’$)
Total Capital
Multiple
EBITDA
Multiple
EBIT
Multiple
Overall airline
multiples 1.2 6.85 3.92**
Low-fare airline
multiples* 2.9 8.1 12.7
Total Business
Value - Overall 808,527 762,261 1,042,474
Total Business
Value - LF 1,953,941 901,359 711,796
* Low-fare airline compas include AirTran, ATA, Frontier, Midwest, Northwest, Ryanair, Southwest and WestJet.
** EBIT Multiple we use average number instead of median number due to negative value in median number.
12. 12
Valuation Approaches - Comp multiple
(million $)
Overall airline
multiples
Low-fare airline
multiples*
Average Business Value 871.09 1,189.00
Less: debt 495.50 495.50
Equity value 375.59 693.53
Equity value / share* 10.70 19.76
* Total outstanding shares: in the last paragraph of the case, using 35.1million outstanding shares.
13. 13
Valuation Approaches - DCF
● WACC
○ Cost of equity: CAPM
Beta, Rf and risk premium
○ Cost of debt: issuance cost
○ D/E ratio
● Terminal growth rate
● Business growth assumption
● Expenditure growth assumption
● Net Working Capital assumption
D/E: 1.3193
Beta: 1.5
Rf and premium: both 5.00%
Outstanding debt: 495 million
Market value of BV: 871 million
Terminal growth rate: 4.5%
WACC: 8.42%
Scenario analysis for:
- Revenue growth and capex
Revenue/NWC maintain at 9.4x
15. 15
Valuation Approaches - Sensitivity analysis
Revenue Growth Scenario
CapexGrowth
● Under different scenario, the average stock price we have in
conclusion is $26.07 per share via DCF method.
16. As a result, our valuation will be at $18.82 per share.
16
Valuation - Equity Value Per Share
17. ● Although after the second market sounding, $25~26 IPO price per share
for JetBlue is still facing demand or supply, it doesn’t mean the IPO price
should be necessarily higher.
● If the stock price traded below IPO price after a few hours of trading, it
means the investors do not have faith in your company, suggesting that is
nearly impossible for the company to raise additional capital through
follow-on equity offerings.
● As a result, our team would recommend an IPO price at $22, which will not
be too low to raise capital for operations, and not too high to hinder future
capital raising and market liquidity. 17
Valuation - Summary
