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JetBlue Airways IPO Valuation
An Analysis of Valuation Processes
JetBlue Takes Off!
JetBlue is an aggressive start-up, which began service in February 2000, and has
grown steadily since its inception. Duplicating Southwest’s simplicity, high
aircraft utilization and low fares, JetBlue offers comfortable, affordable andconvenient point-to-point air travel with some unique amenities (for example,leather seats and live-feed TV monitors). It has relied primarily on word of mouth advertising to execute its strategy. In contrast with most upstartdiscount carriers, JetBlue operates a fleet of 31 brand new, highly fuel-efficientAirbus A320 aircraft and employs a non-unionized FAA certified workforce(pilots, technicians, dispatchers) The management team has an extensiveleadership track record with successful carriers, such as Southwest Airlines.This report examines the April 2002, decision of JetBlue management to pricethe initial public offering of JetBlue, just months after the terrorist attacks of 2001. Although the timingseemed risky, John Owen,Executive vice president andchief financial officer of JetBlue
Airways stated “the market is never dead for a good company with realrevenues and real earnings”. JetBlue had managed to remain profitable an
dgrow aggressively despite the challenges facing the airline industry.
Calculating an Appropriate Pricing Policy Range
The lead underwriter for the JetBlue I.P.O. Morgan Stanley had initiallycalculated a price per share of $22 to $24. However, with sizeable excessdemand for the 5.5 million shares being offered; they had adjusted the rangeupwards ($25 to $26).This report utilized four different share valuation methods: 1) Price/earningsmultiple (comparison pricing); 2) Total capital multiple (comparison pricing);3) EBIT multiple (comparison pricing); and 4) Discounted free cash flows(fundamentals pricing). We conclude that the JetBlue offering price should be$27 to $29.
Over the last 50 years,
I.P.O.’s in the United States
have been underpriced by 16.8 percent on average.This translates to morethan $125 billion thatcompanies have left on thetable in the last 20 years.I.P.O. underpricing is alsoa worldwide phenomenon.In China, the underpricing has been severe, averaging 137.4 percent from 1990to 2010. This compareswith 16.3 percent in Britainfrom 1959 to 2009. Inmost other countries, I.P.O.underpricing averagesabove 20 percent.
We conclude that the JetBlue offering priceshould be $27 to $29
“The market is never dead for a good company with real revenues and real earnings”
Unformatted text preview: JetBlue Airways IPO Valuation I l My neighbor called me the other day and she said, “You. have an interesting little boy." Turns out. i the other day she asked any son-Daniel what he wanted for Christmas. And he said, “i tron: some | stock." “Stock?” she said. “Don't you want video games or anything?" "Nope." he said. "i just I want stock. JetBitte stock." I —David Necleman. CEO and Founder. JetBlue Airways It was April 11. 2002, barely two years since the ﬁrst freshly painted JetBlue plane rolled out at the company's home base at New York City’s John F. Kennedy (JFK) Airport. .letBlue’s ﬁrst years had been good ones. Despite the challenges facing the US. airline industry following the aircraft terrorist attacks of September 2001. the company remained proﬁtable and was growing aggressively. To support their growth trajectory and offset portfolio losses by their venture capital investors, management I was ready to raise additional capital through a public equity offering. A video sum- ' mary of the IPO pricing decision by JetBiue CFO John Owen can be found at ‘ http:il’it.darden.virginia.edui‘letBlueistreaming_linkshtm. Exhibits 1 through 4 pro- vide selections from JetBlue's initial public offering (IFS) prospectus—the name for the document required by the SEC to inform investors about the details of the equity offering. After nearly two weeks of roadshow meetings with the investment community, the JetBlue management team had just ﬁnished their ﬁnal investor presentation and was heading for Chicago’s Midway Airport. With representatives of co-lead manager Morgan Stanley and the JetBlue board patched in on a conference call, it was time for the group to come to an agreement on the offering price of the new shares. The ini- tial price range for JetBlue shares communicated to potential investors was from $22 to $24. Facing sizeable excess demand for the 5.5 million shares planned in the IPO, management had recently ﬁled an increase in the offering price range to $25 to $26. Yet, even at that price range. most of the group thought the stock faced “blow-out“ This case was prepared by Professor Michael]. Schil] with the assistance and cooperation critihn Owen (JetBlue). Garth Monroe (MBA '05). and Chang Cui (MBA '04). It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright © 2003 by the University ofVirgmia Dat'den School Foundation. Charlottesviile. VA. All rights reserved. To antler copies. send an email to [email protected]