Jet blue IPO

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Jan 9, 2024

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Jet blue IPO Should JetBlue proceed with the IPO launch? Assuming that your recommendation is to proceed with the IPO, what should be the IPO price? This is the part where you will spend most of the time/effort. TERMINAL VALUE & IPO PRICE The free cash flows for the time period of 2002 to 2010 have been estimated on the basis of certain assumptions. The operating profit margin used to calculate the net operating profit after tax is 17.1%. The sales of the company have been increased by 4% inflation rate. It has been assumed that all the prices increase by this inflation rate. The tax rate used is 31% as given in exhibit 5. Finally, the terminal growth rate has been assumed to be the growth rate of gross equipment growth of AirTran. Based on these certain assumptions, using the estimated profits for the time period of 2002 to 2010, the free cash flows have been calculated for the company. The terminal value for the year 2011 has also been calculated on the assumed steady growth rate in perpetuity. It has been assumed that the cash flows of the company would

grow at a steady rate of 7%. The terminal value for the future business value has been calculated to be around $9883 million. The enterprise value for the company has been found by taking the sum of the present value of the free cash flows from the year 2002 to 2010 and the terminal value of the foreseeable future in 2011. The total enterprise value is found to be $3567 million. Adjusting the current outstanding shares for the shares that would be issued after going public, the total outstanding shares of the company are 46.07 million. Therefore, on a per share basis the offering price for the new issue of the stock should be $66.29 per share. This price is way too high from the current estimations of the company. The calculations are shown in the appendix attached in the end. TERMINAL VALUE METHOD FOR DETERMINING IPO Terminal value is a very important concept in the valuation of the firms since it constitutes about 60% to 80% of the total enterprise value of the company. The terminal value calculated in this case is also important for calculating the offer price of the company. The assumptions used in the terminal value formula, regarding the growth rate might not turn out to be true in the future, however, the best possible estimates have been used to calculate the future value of the business after the company goes public. Therefore, the terminal value method which is purely based on the free cash flows generated by the business in future is a good method to estimate the future offering price for the IPO. IPO Timing and Price Point Appropriate for JetBlue From the quantitative standpoint, the price of the share calculated using Discounted Cash Flow method is appropriate due to the fact that the DCF method is forward looking approach & it highly depends on the future projection rather than the historical values. Additionally, the DCF Method is focused on generating cash flows as well as less affected by the policies of accounting (Edelson, 2019). The recommended price of a share is $28.81 which is calculated using the DCF method. It is because the price estimated by the management of the company i.e., $25 to $26 leaves too much money on the table. So, the company should offer its investors a share at the price of $28.8 as it would send a strong signal of confidence to them &the entire market. Additionally, the management of the company should ensure that the investor has the best interest of the business. Also, the management of the company should build and maintain strong and positive relations with potential investors and meet their expectations. It is recommended that the company should continue on its strategy of organic growth, and invest in services and products so to offer value proposition and an outstanding experience to customer, it should become more receptive to partnership, it should target the

untapped markets as well to enjoy the first mover advantage, it should also capitalize strategic alliances and invest in R&D to innovate. In doing so, the investors would invest in the company through purchasing shares. According to Morgan Stanley, an investment firm, the IPO deal was "highly oversubscribed by investors and analysts were reportedly awaiting the offering. Some JetBlue management stated that they would consider having the price marked up to show confidence, and that this increase in price would not affect the number of shares bought due to investors eagerly waiting. But with the 9/11 crisis happening just six months prior to the decision, some of JetBlue's management decided that having a fair price would cover the risks facing the entire industry. Looking at their decision, we decided that JetBlue should take the confidence approach and keep the price per share relatively high. Which brought us to the conclusion that JetBlue should have an opening price of $29.00 . This price keeps it near the industry average, while demonstrating their internal confidence towards the success of JetBlue.

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JetBlue Pricing & IPO launch? As depicted by the case study, there has been huge failures faced by all the new entrants in the airline industry. This can be seen through the eighty-seven new airline failures over the past 20 years. Therefore, based on this statistic, the strategy of the company to go public is very risky. It was stated by Morgan Stanley that the deal was hyped by the investors, and he also felt that the conclusion of demand exceeding supply was exaggerated. The share price of the company is calculated using the low fair industry segment. As JetBlue is a valuable low-cost airline, the data of the low-cost US airlines are used to estimate the share price of the company. Therefore, based on the multiple comparison analysis, the mean median values of the closest competitors of Air Blue and the value calculated by the discounted cash flows analysis, the most recommended price for the new IPO should be in the range of $25 to $30 per share. There was a split in views amongst management on the pricing policy. One half wanted to raise the price to avoid leaving "too much money on the table," while the other half wanted to “keep the price modest.” A lower price could help secure the success of the deal by generating the short-term capital requirements and by creating talk among potential investors (while not sacrificing Future capital raising and Market liquidity). In order to recommend a single price, the company should set an IPO price of $25 per share based on the analysis performed, which have calculated the share price of around $25 to $30 per share except the discounted cash flow method which gives a more optimistic offering price for the new IPO. The calculation of the JetBlue’s enterprise using comparable firm data is provided in the Appendix. The company will have clear advantages if it goes public on an offering price of $25 per share. This price has been estimated on the basis of a range of methods which is the best IPO price looking at the scenario of the airline industry and the performance of the company. The company would raise equity and gain financial benefits in the form of raising capital while the debt of the company could be easily repaid. The lenders of the company will be happy to lend larger amounts of debt in future when the company goes public. Apart from this, the company will have all the relative advantages of going public, including increased public awareness and capital expenditure. On the other hand, the first and the foremost disadvantage for the company to go public at this price is that the burden of the underwriting fees might be significant for the company and the cost of IPO might be high for the company. Furthermore, other risks are that a large number of potential shareholders of the company might buy large blocks for shares of the company and the management might lose control of the Air Blue operations until the owner of the company holds a substantial proportion of the equity of the company. This may lead to more focus on the short term than long term growth. IPO Timing and Price Point Appropriate for JetBlue From the quantitative standpoint, the price of the share calculated using Discounted Cash Flow method is appropriate due to the fact that the DCF method is forward looking approach & it highly depends on the

future projection rather than the historical values. Additionally, the DCF Method is focused on generating cash flows as well as less affected by the policies of accounting (Edelson, 2019). The recommended price of a share is $25 ~ $28.81 which is calculated using the DCF method. It is because the price estimated by the management of the company i.e., $22 to $24 leaves too much money on the table. So, the company should offer its investors a share at the price of $25 as it would send a strong signal of confidence to them and the entire market. Additionally, the management of the company should ensure that the investor has the best interest of the business. This means, that the management of the company should build and maintain strong and positive relations with potential investors and meet their expectations. It is recommended that the company should continue on its strategy of organic growth, and invest in services and products so to offer value proposition and an outstanding experience to customer, it should become more receptive to partnership, it should target the untapped markets as well to enjoy the first mover advantage, it should also capitalize strategic alliances and invest in R&D to innovate. In doing so, the investors would participate more in the company through share purchases.