Jetblue Airways Ipo Valuation - 01 The case “Jet “JetBlue Blue Airways Airways IPO Val aluati uation” on” outli outlines nes Jet JetBlue’ Blue’s s inno innovati vative ve strategy and the associated strong financial perforance over the initial two years! in order to deterine the price of initial pu"lic offering of its stoc# on April $%%$& $%%$& To the whole industry of Airlines! the terrorist attac#s of 'epte"er $%%( caused a challenge! especially to large nu"ers of low)fare *&'& airlines& +owever! JetBlue reained profita"le and grew aggressively& ,ro $%%$! the low)fare "usiness odel gained oentu in the *&'& airline industry& The doinant player aong low)fare airlines! 'outhwest Airlines! Airlines! has "een going so successfully with its sta"le growth rate of revenue -./hi"it 01 and incre inc reasi asing ng op opera eratin ting g ar argin gin fo forec recast asts s -./ -./hi" hi"it it 21& As a rel relati ativel vely y new copany! JetBlue had ade significant progress in esta"lishing a strong "rand "y see#ing to "e identified as a safe! relia"le! low)fare airline& In addition! a solid 3eelean’s anageent tea! with 4avid Barger and John Owen 5oining! was fored to enhance the success of going pu"lic& Therefore! to support JetBlue’s growth tra5ectory! going pu"lic and raising financing for the copany is appropriate at this oent& 6oing pu"lic has "oth advantages and disadvantages& Advantages The ain purpose of going pu"lic is to increase capital for the issuer& A pu"lic offering would place a value on the copany7s stoc# and insiders who retain stoc# ay "e a"le to sell their shares or use the as collateral& 6oing pu"lic also creates a type of currency in the for of its stoc# that the "usiness can use to a#e ac8uisitions& In addition! the copany will li#ely have access to capital ar#ets for future financing needs& In this case of JetBlue Airways! the copany can offset portfolio losses "y its it s ve vent ntur ure) e)ca capi pita tall in inve vest stor ors s "y go goin ing g pu pu"l "lic ic!! e ean anwh whilile! e! cr crea eate te e/ e/it it opportunity for venture capitalists and early)stage investors& On the other hand! shareholders increase li8uidity for holdings through going pu"lic&
In addition! going pu"lic to JetBlue will generally result in the a"ility to "etter proote the copany& JetBlue would gain pu"licity! recognition and an iage of sta"ility "y trading pu"licly& Along with prestige and the a"ility to "etter proote the copany! going pu"lic ay allow the copany to attract "etter personnel& To JetBlue’s custoer)service strategy! the eployees’ stoc# options can "e ore valua"le as generous copensation! which would "uild stronger eployee orale& 4isadvantages ,irst of all! going pu"lic is an e/pensive and tiely! and if the offering does not go through! the copany will lose that oney for nothing& Typical e/penses associated with a pu"lic offering include legal and accounting fees! filing fees and underwriter7s e/pense allowance& 6oing pu"lic to JetBlue can also "e an e/treely difficult process! especially if the "oard of anageent is not failiar with the registration process& The copany will need to put all its "usiness affairs in order and the day)to)day "usiness operations will li#ely "e disrupted& Another disadvantage of going pu"lic is that pu"lic copanies operate under close scrutiny& The prospectus reveals su"stantial inforation a"out the copany including transactions with anageent! e/ecutive copensation and prior violations of securities laws& This ay "e inforation the copany would rather not reveal& In addition! pu"lic copanies ust coply with reporting re8uireents under the ./change Act of (9:; as soon as the registration stateent "ecoes effective&
profita"ility after all e/penses and reinvestents& It is one of the any "enchar#s used to copare and analyse financial health& The third one is >elative Valuation Techni8ues! whose ain target eleents include price earnings ration! .BIT4A ultiple! price cash flow ratios! price "oo# value ratios and price sales ratio& 4eterine the price of IPO As shown ./hi"it $ ? Balance 'heet of JetBlue! the total de"t was @(2$ illion and @:(9 illion in $%%% and $%%( respectively& The de"t)to)e8uity ratio was )9&9 -:(9illion):$illion1 in $%%(! and the ratio in $%%% was only )$&0 -(2$ illion)2;illion1! which indicates the leverage changes significantly& In this case however! the "alance sheet only shows the two) year inforation& In accordance with the issuance of IPO! the leverage ratio can "e estiated as relatively sta"le& Therefore! ,<,. would "e prefera"le to value the JetBlue copared to ,<,,& According to ./hi"it 0 ? +istorical Annual 6rowth >ates for 2 ow),are Airlines! the average @>evenue 6rowth rate of the five copanies is ;;C fro (999 to $%%%! and (:&0C fro $%%% to $%%(& Therefore! the @>evenue 6rowth >ate of JetBlue fro $%%( to $%%$ should not "e very different with the rate of previous two growth rates! which indicates that the growth rate -a"out $%%C1 shown in ./hi"it (: sees to "e inaccurate& The further forecasts for nine)year period! which is "ased on the estiated value of $%%$! would not "e appropriate and relia"le inforation to value the fir and its stoc# value&
had an average revenue growth rate of (2&DEC fro (99% to $%%(& In addition! "ased on ./hi"it ((! the air)transport would have a steady trend after year $%%:& Thus! the growth rate after ta#e into consideration of inflation was e/pected to "e (;C! (9C! (0C! $%C and (9C fro $%%$ to $%%D& *nder the assuption that the capital structure! ta/ rate and inflation rate were constant! the nu"er of aircraft grew with growth rate& The operating argin forecasts are estiated fro ./hi"it 2& The ad5usted financial forecast stateent for JetBlue isF @ ,igures in illions G $%%( G $%%$. G $%%:. G $%%;. G $%%2. G $%%D. G 3u"er of aircraft G $( G $; G $0 G :; G ;% G ;0 G @ >evenueplane G @(2&: G @(E&; G @$%&E G @$;&; G @$9&: G @:;&9 G ./pected inflation r G
G 2C G 2C G 2C G 2C G 2C G
Operating argin G $%C G $%C G $%C G $%C G $%C G $%C G @ 4epreciationplane G @%&2 G @%&2 G @%&2 G @%&D G @%&D G @%&D G @
G 2C G 2C G 2C G 2C G 2C G
3H< Turnover G -D&21 G -D&21 G -D&21 G -D&21 G -D&21 G -D&21 G >evenue G @:$% G @:D2 G @;:2 G @2(: G @D(2 G @E:$ G
The discount rate for ,<,. is the cost of e8uity which can "e calculated "y fK"etaLris# preiu 2CK(&:L2C1& He assue that the principal repayent was (% illion each year due to the successful issuance of IPO and the proceeds fro de"t issue was 0% illion due to the e/pansion of the fir& Also! the long ter de"t in $%%$ was assued to "e (%% illion depending on past years perforance& The ,<,. for JetBlue is calculated as the figure "elow! @ illion G $%%$ G $%%: G $%%; G $%%2 G $%%D G 3et incoe G ;0 G 2E G D0 G 0( G 9E G plus depreciation G ($ G (D G (9 G $; G :% G inus capital e/penditure G 2( G 0$ G 9E G (:; G (D% G inus change in wor#ing capital G -E1 G -(%1 G -($1 G -(D1 G -(01 G inus principal repayent G (0 G (0 G (0 G (0 G (0 G plus proceeds fro new de"t issues G 0% G 0% G 0% G 0% G 0% G ,<,. G E9 G D: G D; G 2% G ;D G PV of ,<,. as at Apr :%! $%%$ -((&2C1 G E: G 2$ G ;0 G :; G $0 G =ar#et value of fir G $:2 G G G G G ess long ter de"t G (%% G G G G G Per share value -2&2 illion shares1 @ dollar G $;&2 G G G G G The share price calculated "y the ,<,. ethod is @$;&2& It is close to the initial offering range& The P. ratio of the industry or copara"le firs ties the earnings of the fir "eing valued is another ethod to calculate the value of the fir& The P. ratio is calculated fro the average P. ultiple of Aerican low)fare airline copany which consists of AirTran! Alas#a Air! Aerica Hest! ATA!
,rontier and 'outhwest& The average P. ratio was 2&9! thus! the value of the fir was @(29&: illion -calculated "y 2&9L$E1 and the share price was @$9 -calculated "y (29&:2&21& $%%( G P. =ultiple G AirTran G $2&: G Alas#a Air G )(9&: G Aerica Hest G )%&0 G ATA G )2&E G ,rontier G 0&; G 'outhwest G $E&D G average G 2&9 G To su up! the share price calculated "y the ,<,. ethod is less relia"le copare to the relative valuation ethod& The inforation used to copute the ,<,. was estiated with uncertainty! instead! the P. ultiple and earnings of JetBlue was the real nu"er and ight "e ore persuasive and close to the true value of the fir& Thus! the initial offering price should "e close to @$9 which was higher than the price suggested "y analysts& It sees reasona"le "ecause of the popularity and the valuation of the JetBlue&
