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JetBlue Airways
IPO Valuation
Ebad Ashfaque
Sean Lin
Congyi Liu
Case Questions
2
Case Questions
What are the advantages and disadvantages of going public?
What different approaches can b...
Agenda
•  Background overview
•  IPO process
•  Valuation approaches
•  Recommendation
3
Background Overview
•  In July 1999, David Neelman announced plan to launch a new airline that
would bring “humanity back ...
Background Overview
•  Positioned in New York with 21 million potential customers in the metropolitan
area.
•  In early 20...
IPO Process
6In days
Underwriter selection meeting
“Quiet period” begins
108
0
15
45
Due diligence
Registration
(announcem...
Pros:
•  Financial benefit in the form of raising capital
•  Capital can be used to fund R&D, capital expenditure or even ...
Relationship between Offering Price and
Opening Price of an IPO
•  IPO investors purchase the shares from the company at t...
•  Initial price range for JetBlue after first roadshow: $22 - 24
•  Management filed an increase in the IPO price: $25 – ...
•  Comparable companies’ multiples
•  Overall airlines’ multiples and low-fare airlines’ multiples
•  Total capital multip...
11
Valuation Approaches - Comp multiple
(000’$)
Total Capital
Multiple
EBITDA
Multiple
EBIT
Multiple
Overall airline
multi...
12
Valuation Approaches - Comp multiple
(million $)
Overall airline
multiples
Low-fare airline
multiples*
Average Business...
13
Valuation Approaches - DCF
•  WACC
•  Cost of equity: CAPM
Beta, Rf and risk premium
•  Cost of debt: issuance cost
•  ...
14
Valuation Approaches - DCF
Price / share via DCF method: $26.00
15
Valuation Approaches - Sensitivity analysis
Revenue Growth Scenario
CapexGrowth
Under different scenario, the average s...
As a result, our valuation will be at $18.82 per share.
16
Valuation - Equity Value Per Share
•  Although after the second market sounding, $25~26 IPO price per share
for JetBlue is still facing demand or supply, it ...
THANK YOU
Questions?
18
Appendix 1
Business forecast by JetBlue
19
Appendix 2
Free Cash Flow estimates
20
Appendix 3
21
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JetBlue Airways IPO Valuation

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A valuation case study for Corporate Finance (FE820) of Questrom School of Business, Boston University

Published in: Economy & Finance
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JetBlue Airways IPO Valuation

  1. 1. JetBlue Airways IPO Valuation Ebad Ashfaque Sean Lin Congyi Liu
  2. 2. Case Questions 2 Case Questions What are the advantages and disadvantages of going public? What different approaches can be used to value JetBlue’s shares? At what price would you recommended that JetBlue offer its shares?
  3. 3. Agenda •  Background overview •  IPO process •  Valuation approaches •  Recommendation 3
  4. 4. Background Overview •  In July 1999, David Neelman announced plan to launch a new airline that would bring “humanity back to air travel.” •  Hired an impressive new management team •  David Barger, COO, former vice president of Continental Airlines •  John Owen, CFO, former executive vice president and treasurer of Southwest Airlines •  Strategy--”Fixing everything that sucked” •  Point to point service •  Lowest cost per available-seat-mile of any major US airlines in 2001--6.98¢ •  Safe, reliable, low-fare airline that was focused on customer service 4
  5. 5. Background Overview •  Positioned in New York with 21 million potential customers in the metropolitan area. •  In early 2002, operated 24 aircraft flying 108 flights per day to 17 destinations. •  Concerns •  87 new-airlines failures over the previous 20 years •  9.11, US airlines industry lost $7.7 billion in 2001 •  Competitors •  Southwest •  Frontier •  WestJet 5
  6. 6. IPO Process 6In days Underwriter selection meeting “Quiet period” begins 108 0 15 45 Due diligence Registration (announcement) date 75 SECreviewperiod 99 100 50 60 Red herring Road show Letter of comment received from SEC; file amendments Effective date Public offering date Settlement date •  The IPO process takes approximately 3-4 months •  Hiring a bank or an underwriter to guide the company through the process •  Submit the documents to SEC •  Handing out the ‘Red Herring’ to prospective investors •  Going out on Road Show to seek interest in the IPO •  Finalizing the IPO •  Distributing the IPO Shares
  7. 7. Pros: •  Financial benefit in the form of raising capital •  Capital can be used to fund R&D, capital expenditure or even to pay off existing debt. •  Increased public awareness of the company Cons: •  More disclosures to the investors •  High cost incurred in complying with regulatory requirements •  Focus on short term results rather than long term growth due to added pressure IPO Advantages and Disadvantages 7
  8. 8. Relationship between Offering Price and Opening Price of an IPO •  IPO investors purchase the shares from the company at the offering price. •  The price at which the stock opens for trading is called the opening price. •  Depending on the interest from investors, the opening price can be higher or lower than the offering price. •  If the opening price is higher, the IPO investors have an immediate gain; if it is lower, they have an immediate loss. 8
  9. 9. •  Initial price range for JetBlue after first roadshow: $22 - 24 •  Management filed an increase in the IPO price: $25 – 26 •  Pros for higher IPO price: If the opening price is higher than the offering price, the company is able to generate higher capital from the IPO. •  Pros for lower IPO price: In some cases, when the opening price is too high, the demand can be unsustainable and can lead to loss later on. IPO Price: high or low? 9
  10. 10. •  Comparable companies’ multiples •  Overall airlines’ multiples and low-fare airlines’ multiples •  Total capital multiple, EBITDA multiple and EBIT multiple •  Discounted cash flow •  Key assumptions •  Scenario analysis Valuation Approaches 10
  11. 11. 11 Valuation Approaches - Comp multiple (000’$) Total Capital Multiple EBITDA Multiple EBIT Multiple Overall airline multiples 1.2 6.85 3.92** Low-fare airline multiples* 2.9 8.1 12.7 Total Business Value - Overall 808,527 762,261 1,042,474 Total Business Value - LF 1,953,941 901,359 711,796 * Low-fare airline compas include AirTran, ATA, Frontier, Midwest, Northwest, Ryanair, Southwest and WestJet. ** EBIT Multiple we use average number instead of median number due to negative value in median number.
  12. 12. 12 Valuation Approaches - Comp multiple (million $) Overall airline multiples Low-fare airline multiples* Average Business Value 871.09 1,189.00 Less: debt 495.50 495.50 Equity value 375.59 693.53 Equity value / share* 10.70 19.76 * Total outstanding shares: in the last paragraph of the case, using 35.1million outstanding shares.
  13. 13. 13 Valuation Approaches - DCF •  WACC •  Cost of equity: CAPM Beta, Rf and risk premium •  Cost of debt: issuance cost •  D/E ratio •  Terminal growth rate •  Business growth assumption •  Expenditure growth assumption •  Net Working Capital assumption Beta: 1.5 Rf and premium: both 5.00% Outstanding debt: 495 million Market value of BV: 871 million D/E: 1.3193 Terminal growth rate: 4.5% WACC: 8.42% Scenario analysis for: - Revenue growth and capex - Revenue/NWC maintain at 9.4x
  14. 14. 14 Valuation Approaches - DCF Price / share via DCF method: $26.00
  15. 15. 15 Valuation Approaches - Sensitivity analysis Revenue Growth Scenario CapexGrowth Under different scenario, the average stock price we have in conclusion is $26.07 per share via DCF method.
  16. 16. As a result, our valuation will be at $18.82 per share. 16 Valuation - Equity Value Per Share
  17. 17. •  Although after the second market sounding, $25~26 IPO price per share for JetBlue is still facing demand or supply, it doesn’t mean the IPO price should be necessarily higher. •  If the stock price traded below IPO price after a few hours of trading, it means the investors do not have faith in your company, suggesting that is nearly impossible for the company to raise additional capital through follow-on equity offerings. •  As a result, our team would recommend an IPO price at $22, which will not be too low to raise capital for operations, and not to high to hinder future capital raising and market liquidity. 17 Valuation - Summary
  18. 18. THANK YOU Questions? 18
  19. 19. Appendix 1 Business forecast by JetBlue 19
  20. 20. Appendix 2 Free Cash Flow estimates 20
  21. 21. Appendix 3 21

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