United Airlines Seeks Rights Issue To Guard Tax Assets; Street Sees 11% Downside

United Airlines Holdings Inc. will ask its shareholders for approval of a rights issue plan to protect tax assets in case the ailing air carrier will be threatened by a hostile takeover move or ownership change.

United Airlines (UAL) had consolidated federal net operating loss carryforwards (NOLs) and other tax assets of about $8.2 billion as of Sept. 30. The US airline said that its Board of Directors has unanimously approved the tax benefits preservation plan in light of the decline in UAL’s common stock due to the sharp drop in air travel demand caused by the COVID-19 pandemic and other macroeconomic factors, which in turn could result in potential transactions involving the sale or issuance of its shares. United Airlines will seek shareholder approval for the plan at its 2021 annual meeting. 

“The purpose of the plan is to protect the company’s ability to use these tax assets, which would be substantially limited if the company experienced an “ownership change”,” United Airlines said in a statement. “UAL’s Board of Directors determined to adopt the plan to prevent an inadvertent impairment of the company’s NOLs.”

According to the plan, United Airlines will issue, by means of a dividend, one preferred share purchase right for each outstanding share of UAL common stock to stockholders of record at the close of business on December 14, 2020. Initially, these rights will not be exercisable, unless a person or group acquires beneficial ownership of 4.9% or more of the outstanding shares of UAL common stock in a transaction not approved by its board.

In that situation, each holder of a right will be entitled to purchase, at the then-current exercise price, additional shares of UAL common stock at a 50% discount. The board has an option to exchange each right, in whole or in part, at an exchange ratio of one share of UAL common stock per outstanding right.

United shares have shed 44% of their value this year as the lockdown mandates tied to the outbreak of the coronavirus pandemic brought travel demand to an almost complete stand-still. The stock saw some recovery last month as UAL jumped 42% fueled by a broad stock market rally amid optimism that the progress made on the potential approval of safe and effective Covid-19 vaccine would result in a faster recovery of the aviation industry. (See United Airlines stock analysis on TipRanks).

Raymond James analyst Savanthi Syth last week reiterated a Buy rating on the stock with a $60 price target (22% upside potential), citing UAL’s “compelling valuation risk-reward”.

“United is taking a different approach from its legacy peers in creating flexibility (e.g., pilot agreement spanning towards the end of 2022 that provides more cost variability, no permanent fleet retirement decisions yet) to be ready for a faster than anticipated recovery that could lead to near term market share gains (vs. competitors that would require more time to bring capacity back online),” Syth wrote in a note to investors. “However, we believe investors will be focused on the potential 2022 earnings recovery.”

For now, it looks like the rest of the Street is sidelined on the airline’s stock. The Hold analyst consensus breaks down into 5 Holds and 3 Sells versus 5 Buys. Meanwhile, the average price target of $43.60 puts the downside potential at about 11% in the coming 12 months.

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