In April 2002, the management of JetBlue Airways decided to price the IPO of the company's stock despite a bad period. It seeks to answer the question of what should the IPO price valuation for JetBlue Airways be.
Michael J. Schill, Garth Monroe, Cheng Cui
Harvard Business Review (UV2512-PDF-ENG)
August 20, 2003
Case questions answered:
- What is the Cost of Debt?
- What are your assumptions and justifications for such?
- What should the IPO price valuation for JetBlue Airways be?
- Create a full financial valuation.
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JetBlue Airways IPO Valuation Case Answers
This case solution includes an Excel file with calculations.
Executive Summary – JetBlue Airways IPO Valuation
In July 1999, David Neeleman started JetBlue Airways, founded on the ideology of bringing “humanity back to air travel.” Despite the odds that 87 start-up airlines similar to theirs failed in the past 20 years, David was determined to make this work through his commitment to innovation in people, policies, and technology.
In search to make this work, JetBlue hired well-established individuals in the airline business to work in upper management positions for the company. Seeing the vision, investment firms such as Weston Presidio Capital, Chase Capital Partners, and Quantum Industrial Partners invested $130 million.
This large investment allowed JetBlue to grow fast early on. The company’s early success was due to Neeleman’s idea of fixing everything that wasn’t working for air travel. He made flights cheaper and applied luxuries such as leather seats and live TV, as well as flights to big metropolitan areas.
All in order to give passengers a good and affordable experience. After the horrific terrorist attacks on September 11th, 2001, JetBlue Airways adapted and overcame the situation flourishing in the market of low-fare airlines.
The company did so well that the discussion of taking the company public through an IPO was a real possibility that would be happening.
One advantage of JetBlue Airways going public would be the company’s cost of capital would shrink. An additional advantage would be the large inflow of equity to the company to pay back debt holders, along with the company asking for larger amounts of money from lenders.
Having more money would help the company’s growth, allowing them to compete with the top tier of low-fare airway companies by investing in what they see as an area they need to improve in.
There are positives in going public but also negatives too. A disadvantage to going public would be the control of JetBlue. Unless the owner has a large majority of the shares, the company could be at risk to an investor who could buy a significant portion of the stock, gaining more of a voice in the company through votes.
Another disadvantage would be that when JetBlue goes public, they will have to release all annual reports and accounting information to the public, allowing all their competitors insight into the way they operate financially. JetBlue Airways will also have to comply with a new set of rules that public companies have to follow.
There are a few effective methods for estimating the best share price for a new market entrant to go public in an IPO. These include the terminal value method, industry averages multiple approaches (based on selected peer groups), and an IPO estimate gleaned from Jet Blue’s financials exclusively.
Firstly, the terminal value method of valuation has many assumptions, such as growth rate, which will likely be found to be inaccurate in the future. Therefore, basing this calculator entirely on the free cash flows could yield an accurate estimation for the IPO.
In the second form of valuation, one must look at the leading and trailing EBIT values for JetBlue Airways and…
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