Guest abc Posted October 21, 2003 Share Posted October 21, 2003 WJA $2239 M AC $98 M These are the quoted market values of the two airlines, respectively. Perhaps someone "in the know" might explain if these numbers have any significance. It just seems with Air Canada's market dominance, it's brand recognition, and history (not to mention it's high profile with the Air Canada Centre, Montreal Grand Prix, Canadian Open Golf Tournaments, Aeroplan)...... How is it possible that Westjet is "worth" almost 23 times AC? Also, why would anyone pay $700 M for AC (Mr. Victor Li or Cerberus) for an airline "worth" only $98 M? Certainly I do not want to demean AC, but I look forward to someone illuminating the concept of "worth." I thought something was "worth" what someone else was prepared to pay for it. Link to comment Share on other sites More sharing options...
Guest Starman Posted October 21, 2003 Share Posted October 21, 2003 You're exactly right... the respective stocks are worth what someone is willing to pay for them. Market Cap is simply the number of outstanding shares multiplied by the value of the last trade. Not a very good indicator of a company's actual "value", but a very good indicator of the stock's value to the investing public. Link to comment Share on other sites More sharing options...
dagger Posted October 21, 2003 Share Posted October 21, 2003 Air Canada's market cap should be zero. The $98 million figure is irrelevant, just short sellers, day traders and dreamers of the impossible dream. The day will come when there is a new market cap, with new majority shareholders, a large creditor minority, and then it will be interesting to watch how the stock trades. Link to comment Share on other sites More sharing options...
proview Posted October 21, 2003 Share Posted October 21, 2003 1. The market capitalization for Air Canada cannot be compared to that of Westjet because AC is in bankruptcy while Westjet is a going concern. However, if Air Canada emerges from bankruptcy (with Mr. Li or whoever as principal owner), then the new AC may have a market cap (based on the new shares, not the current ones) that can be compared with Westjet's. 2. Even if Air Canada becomes a going concern its market value is likely to trail that of carriers such as Westjet because of the “growth” premium. It works like this: The market likes to price shares of companies at, say, 15 times earnings. Westjet's shares trade at about 30 times earnings. For $30 you get $1 of earnings. West jet's revenues and earnings are growing at 50% per year (my numbers are exaggeratedly to make the math easy). Next year that $30 will be giving $1.50, and the year after, 2.25. Only two years and we as good as being below 15 times earnings. Hence the premium over the price of the stock in a non growth company. 3. Of course, if West jet stops growing the premium will tend to disappear. Your more important question is “why would anyone pay $700 M for AC “? The first point is that the $98 M is not an option. That would buy the “old” company, which would have all the old debts, binding contracts, pension obligations, and whatever. The value of that company is essentially zero. The new investors are interested in a “new” company without this baggage. If the new company can be profitable, the $700 M can be made back quickly. If AC had the same rate of earnings compared to revenue as West jet, it would make $700 M per year profit! (AC has never earned anything near this in the past!). The potential new owners would be betting that the new company would be immediately profitable. The dark side of the speculation revolves around the possibility that the restructuring does not satisfy the potential investor. If he is not satisfied, he can basically walk away, taking his $700 M with him. For $700 M one could probably start a new major airline from scratch. West jet started 7 years ago with supposedly some $20 M - $30 M. If Air Canada were wound up, this might be possible (but not a sure thing!). I suspect that not everyone agrees with my analysis. I am not employed in any way in the air line industry. Link to comment Share on other sites More sharing options...
Guest abc Posted October 22, 2003 Share Posted October 22, 2003 Perhaps your last comment "I am not employed in any way in the air line industry" is the reason that I found your post quite informative. Thank you for taking the time to respond. Link to comment Share on other sites More sharing options...
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