UAL and Continental M&A Battle May Hinge on Stock Price

Several press reports say that merger talks between UAL (UAUA) and Continental (CAL) may be in trouble. The hang up is the price of each company's shares in a cashless merger. In other words, there's not agreement on what portion of the new company the shareholders of each could receive.

The disagreement could hinge on several issues, including balance sheets and earnings, current stock price, and the trend of share price over the last year. UAL's 10-K shows that it lost $651 million last year on $16.3 billion in revenue. It had long-term debt of $7.3 billion, much of it due after 2014. Continental has revenue of $12.6 billion and a net of $282 million, according to its 10-K, and it had long-term debt of $5.3 billion.

But P&L and balance sheet data are only a modest part of the calculation, which includes among other things, long-term leases for aircraft, age of fleets, and profitability of key routes. Those relative values should show up in the market caps of the two firms. Continental's is $3.1 billion and UAL's is $3.9 billion, which makes some sense in terms of the size of the airlines. UAL has 55% of the combined market cap of the two firms together.

But UAL's strongest argument for getting a much higher valuation in a marriage may have little to due with stock price or balance sheets, and more to do with the stock market's assessment over the last year. UAL's stock price is up over 300% and Continental's only 100%. The data is worse so far this year with UAL's stock price up 60% and Continental's only 25%.

If the talks do break down, it may be over which airline has better momentum on Wall Street, and that advantage clearly goes to UAL.