Alaska-Hawaiian Deal Doubts Soothed After DOJ Deadline Extended

(Bloomberg) -- Traders trying to calculate regulators’ intentions have sent shares of Hawaiian Holdings Inc. on a roller coaster ride, but Thursday left them more confident than ever that Alaska Air Group Inc.’s $1.9 billion plan to buy the rival airline will go through. 

Hawaiian shares jumped 10% to close at $16.46 Thursday, narrowing the gap with Alaska’s $18-per-share takeover bid to less than $2 — the tightest level since the merger was announced in December. 

Some investors were interpreting an agreement reached Thursday that extended the merger review process to Aug. 20 as a sign that a potential settlement is being hammered out. The delay allows the Justice Department more time to decide whether to block the tie-up or allow it to move forward. It was the second such extension this week. 

“To many investors, the extensions have provided optimism the parties can avoid a suit, which seemed likely only a few weeks ago,” said Adam Halper, global head of research and event strategy at Churchill Capital.

With the Biden administration taking a tough stance on airline mergers — and derailing a planned combination of JetBlue Airways Corp. and Spirit Airlines Inc. earlier this year — concerns on if the Hawaiian deal could survive regulatory muster had been swirling. Just three weeks ago, Hawaiian was trading below $11, the widest discount to Alaska’s offer. 

Thursday’s extension appears to have quelled those fears, even after traders were rattled earlier in the week by a local report that a DOJ trial lawyer was set to appear in a federal district court in Honolulu. 

At current levels, the market is pricing in roughly 85% ultimate odds that deal gets done, according to several merger arbitrage specialists. 

The longer the process drags on, the more investors expect the ongoing cooperative talks validate a perceived weakness in the DOJ’s ultimate case, Halper said. That has also spurred some traders to readjust their downside analysis of the stock for the day a potential suit could be announced.

Of course, most of this is just guess work as few are privy to what may be going on in the halls of the DOJ, especially when the parties haven’t publicly disclosed the status of talks.

More than 33,000 contracts on Hawaiian changed hands on Thursday, almost four times the 20-day average.

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