JetBlue Seen As The 'Only' Logical Acquirer Of Virgin America, May Be Forced Into Deal

Reports that Virgin America Inc VA is considering buyout offers sent the stock soaring in Wednesday’s trading session. Although the identities of potential buyers have not been revealed, Buckingham analyst Daniel McKenzie sees JetBlue Airways Corporation JBLU as the only logical buyer.

According to McKenzie, a JetBlue/Virgin America merger makes a lot of sense, but JetBlue has never been active in M&A.

“However, under the scenario where Mr Branson’s minority stake ends up in the hands of a Middle Eastern airline (say, Etihad) and where Virgin becomes a well-capitalized competitor (e.g. Middle Eastern airlines have proven a willingness to lose vast amounts of money for small market share gains), JBLU could be forced to move on Virgin,” he explains.

Related Link: Virgin America Stock Takes Off After Buyout Report

McKenzie sees limited potential long-term upside for Virgin America shareholders if the company remains independent.

If a buyout does happen, he expects a stock for stock transaction at a 15-35 percent premium. A combined JetBlue/Virgin America would only hold about 5.0 percent market share, so the deal likely wouldn’t face any major antitrust push-back from regulators.

Despite incremental modest upside for Virgin America’s stock if a deal is completed, Buckingham maintains its previous Buy rating and $40 price target.

Disclosure: the author holds no position in the stocks mentioned.