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What Acquiring Virgin Atlantic Could Mean for Delta

December 10, 2012 | About:
With its stock trading positively today, Delta Airlines has driven media to speculate over its potential takeover of England-based Virgin Atlantic Airways, by possibly buying some or all of Singapore Airlines’ (SINGF) 49 percent stake of the privately-owned company.

The majority owner, Virgin founder Richard Branson, will keep his 51 percent seat, despite talks of ownership swapping. In his blog today, he posted “Rumors have been spread in the press that I am planning to give up control of Virgin Atlantic... this is wishful thinking and totally misguided.”

Singapore Airlines paid about 600 million pounds for its Virgin stake in 1999, which Bloomberg reported could now be worth $961 million.

Rumors point Delta’s interest in Virgin toward expanding its presence in London’s Heathrow airport, which would open up a slew of transatlantic flights, due to the large amount of slots that Virgin holds at the airport.

Just today, Virgin Atlantic announced plans to launch a domestic flying program within the UK, adding 24 domestic flights a day to its existing long-haul network, bumping 9 slots of British Airways to make room for this new program. Virgin remains the second-largest carrier at Heathrow Airport, after British Airways.

Year to date, Delta stock has gained 25.34 percent in value. It has a 16.74 percent annual revenue growth rate, which has been growing 4.9 percent in the last twelve months.

1355179692132.pngDAL data by GuruFocus.com

In November alone, its revenue improved 2.5 percent versus the prior year, due to capacity discipline and a strong demand during Thanksgiving, according to its November financial report.

Overall, Delta has performed strongly in its operational business. In the report, the company’s completion factor was 99.6 percent, a two-point improvement year over year.

The stock is trading at $10.14, with a P/B ratio of 7.1 and a dividend yield of 3.1 percent.

In the third quarter, the following Gurus have added to their stake of Delta: George Soros added to his stake by 1,140 percent; John Griffin added by 15.16 percent; Robert Olstein added to his stake by 26.38 percent; David Tepper added to his take by 8.95 percent and Steven Cohen added to his stake by 432.35 percent. (DAL: Guru Trade)

Guru investors Joel Greenblatt and Jeremy Grantham presented the stock as a new buy.

Media reports announcing the possible Virgin-Delta partnership have highlighted the positive returns about the deal for Delta. This includes not only expanding at Heathrow airport for Delta, but also a partnering with Air France-KLM (AFLYY), which has been on its business radar. Since CNBC reports that the European Union requires that EU carrier be under European control and, Delta would need to involve an EU airline to sought majority control of Virgin, giving it reason to delve into a deal with Air France.

On the other hand, critics about the deal are concerned about how it could negatively impact Delta.

For one, Virgin reported a pretax loss of 80.2 million pounds, about ($129 million). The Airline is losing money, in addition to hunting for a new chief executive due to its current officer retiring early next year.

Fortune blogger, Cyrus Sanati posts:

“Contrary to most media reports, Virgin isn't some Heathrow gold mine slot machine, it only controls around 3% to 5% of them and uses all of them, mostly on routes that Delta already serves, according to Deloitte. Just ask Singapore how many slots it got from its deal with Virgin: zero. Indeed, when Singapore recently needed a slot pair for a new flight out of Heathrow it was forced to buy them from South African Airways.” (Read A Virgin Deal Makes No Sense for Delta.)

Delta Airlines has yet to announce a solid decision about its plans with Virgin. No specific financial amounts have been released.

About the author:

Dianne Tordillo
Dianne Tordillo is staff writer for GuruFocus.com. She reports on a variety of financial news, primarily dealing with investor portfolios and stock trades. Her articles also highlight insider trades, as well as the many useful features of GuruFocus.

Visit Dianne Tordillo's Website


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