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Alaska Air to Buy Virgin America: 2 ETFs to Consider

Virgin America (VA) impressed in Monday’s trading session with a 42.5% surge. The massive gain for this small airline came after Alaska Air Group (ALK), the parent company of Alaska Airlines, outbid JetBlue Airways (JBLU) to buy Virgin America for $4 billion, including debt.

The move triggered a fresh wave of consolidation in the airline industry after a hiatus since the merger of American Airlines and US Airways in 2013.

Alaska Air-Virgin America Deal in Detail

As per the terms of the deal, Alaska Air will pay $57 per share in cash for Virgin America – a premium of 47% to Virgin America’s stock price of $38.90 at the close on April 1. The transaction – expected to be completed by January 2, 2017 – has already been approved by the board of directors of both companies and is seeking approvals from Virgin America’s shareholders and regulators (read: Should You Bet on Airlines ETF Despite Mixed Earnings?).

The deal, if approved, will allow Alaska Air to overtake JetBlue and become the fifth largest U.S. airline by overall traffic. Additionally, the proposed acquisition will create a West Coast powerhouse with a big presence in nearly every major market around the coast. The combined entity will have strong hubs in San Francisco and Los Angeles, the two coveted gates at Dallas Love Field, and in Seattle.

The transaction is expected to generate annual net synergies of $225 million at full integration after the one-time integration cost of as much as $350 million and boost Alaska Air revenue by 27% to more than $7 billion. Additionally, the combination will be accretive to earnings per share in the first full year, excluding integration costs.

Market Impact

Virgin America’s acquisition by Alaska Air was well received by investors and the stock hit a fresh high of $55.43 per share during the session, since its 2014 initial public offering. The stock crushed its average volume as nearly 15.7 million shares moved hands compared with just 1.1 million on average. On the other hand, ALK shares dropped as much as 5% at the close on the day on elevated volumes of 6.5 million compared with 1.5 million on average.

The merger news has put the spotlight on a couple of ETFs with substantial exposure to the in-focus two firms. Investors could ride the potential surge through these ETFs (read: ETFs & Stocks from Top-Ranked Sectors to Buy Now):
 
U.S. Global Jets ETF (JETS)

This fund provides exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. In total, the product holds 33 securities with Alaska Air and Virgin America being the top 10 holdings accounting for 4.04% and 3.12% share, respectively. It has gathered $57.4 million in its asset base while sees a lower trading volume of nearly 43,000 shares a day. It charges investors 60 bps in annual fees and gained 0.9% on the day following the merger announcement. The ETF is up 1.3% in the year-to-date timeframe.

SPDR S&P Transportation ETF (XTN)

The fund tracks the S&P Transportation Select Industry Index, giving investors exposure to a small basket of 46 securities. Of these, Virgin America occupies the top spot with 3.3% allocation while Alaska Air takes the seventeenth spot at 2.5%. From a sector perspective, trucking takes the largest share at 30.8%, followed by airlines (27.7%), air freight & logistics (20.4%) and railroads (12.6%). The fund has accumulated nearly $206.8 million in AUM while sees moderate trading volume of more than 68,000 shares a day. It charges 35 bps in annual fees and added 0.6% on the day. From a year-to-date look, XTN returned about 7% (see: all the Industrials ETFs here).
 
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VIRGIN AMERICA (VA): Free Stock Analysis Report
 
ALASKA AIR GRP (ALK): Free Stock Analysis Report
 
JETBLUE AIRWAYS (JBLU): Free Stock Analysis Report
 
US GLOBAL JETS (JETS): ETF Research Reports
 
SPDR-SP TRANSPT (XTN): ETF Research Reports
 
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