Bankers and capital markets - These bête noir of the credit crunch are now the kingmakers when it comes to creating the airlines of the future. So why are independent M&A advisors suddenly so shorted?
What do you need if you have the following predicament? You sense a once in a lifetime opportunity to consolidate your industry and create a company sufficiently diverse to survive any future economic troubles. Standing in the way, however, are pension deficits, lots of corporate debt, Union battles and, most importantly, competition authority rules. The answer, of course, is bankers and the capital markets. These bête noir of the credit crunch are now the kingmakers when it comes to creating the airlines of the future. So why are independent M&A advisors suddenly so shorted?
Greenhill & Co (GHL) are in independent investment bank with previous experience working on airline deals. US listed GHL worked for Delta Air Lines (DAL) from 2006, steering it through bankruptcy, a hostile approach from US Air and a merger with Northwest Airlines. Short selling in Greenhill has shot up of late from an already high 8% of total shares to 16%. At the same time, the price has been rebounding after an almost continual fall since October last year. With so many companies working on takeovers and with the airline industry in consolidation mode it is hard to understand the negative sentiment we can observe in this M&A specialist.
Evercore Partners (EVR) are another US listed M&A advisor showing a recent spike in short interest. Like GHL, the price had been falling up until late July when it bottomed out and has recently increased markedly. Short selling is over 10% of the shares outstanding but was as high as 12% a few weeks ago. They may have missed earnings estimates in Q2 but the volume of takeovers has proliferated since then and they are currently working for Sanofi in their Genzyme bid and helped Intel buy Infineon Wireless.
Of course, the big investment banks will be the main beneficiaries from fees associated with airline consolidation since they can charge for advice and make money from issuing any new instruments to finance a deal. Their M&A departments have been starved of deals for so long but they now look set for a busy autumn spent working on, amongst others, complicated airline mergers. UBS (UBSN) are advising British Airways (BAY) on their merger with Iberia so stand as good a chance as any bank of working on more deals for BA. Short interest in UBS is only 1.2% and recently falling. No major investment bank has significant short interest.
Lawfirms will be burning the midnight oil working on ways round the competition rules but since they are not public companies so we have no visibility on how they are predicted to perform. I will conclude by saying that it is in the public interest that airlines can move to a more sound financial footing. As things stand they cannot afford to invest as their businesses are. We will fly on older and older planes and be served by more and more grumpy cabin crew thereby reducing the appeal of long distance travel. Banks and the capital markets can dispel their image as parasites on society if they are able to help airlines make this leap through some serious consolidation.
