AMR Climbs on Sabre Spinoff

AMR will distribute its 83% interest, or 107 million shares, to AMR shareholders in a $6.2 billion deal.
Publish date:

Updated from 10:25 a.m. EST



, the parent company of

American Airlines

, announced Tuesday that it would spin off its controlling stake in

Sabre Holdings

(TSG) - Get Report

, its travel reservation and information technology service, in an effort to increase the stock market value of both companies.

The market welcomed the news. In midday trading Tuesday, AMR rose 3 3/4, or 5%, to 66 13/16, while Sabre gained 1 1/16, or 2%, to 52 15/16. (AMR settled up 4 27/32, or 8%, to 68 1/2, while Sabre ended up 2 3/4, or 5%, at 54 5/8.)

AMR will distribute its 83% interest, or 107 million shares, to AMR shareholders in a $6.2 billion deal, subject to approval from the

Internal Revenue Service

. AMR shareholders will receive 0.7 share for each share of AMR they own. The deal is expected to close in the first quarter of 2000.

William Hannigan, most recently the president of

Southwestern Bell's SBC Global Markets

, part of

SBC Communications


, joins as president and chief executive of the newly independent company. He will also serve as chairman of Sabre's board of directors.

Analysts have long hoped that AMR would spin off the unit and the move is seen as a positive one for both companies, according to Helane Becker of

Buckingham Research Group

. The analyst rates AMR a buy and her firm does not participate in underwriting.

Shares of both companies have languished of late. AMR, though up 9.52% in the last three months, is down 6.21% over the last year. At the same time, Sabre has fallen 16.67% over the last six months.

This move should increase the stock price of both companies over the long run. "By having two completely separate companies valued in the market, both AMR and Sabre should benefit from clearer market comparisons with their peers," Donald Carty, chairman and chief executive of AMR, said in a statement. "This should result in a stock price for both companies that more appropriately reflects their full value and potential."

But the most obvious benefit to Sabre: It may now be easier for the company to build the client list for its information technology outsourcing business since there will now be a perceived firewall between the American Airlines and Sabre operations.

Even though Sabre successfully signed

US Airways Group

(U) - Get Report

as a customer in 1997, other of American Airlines' domestic competitors have been reluctant to strike a deal with the company, primarily because of discomfort over the close relationship with American and the access that American would have to proprietary information.

Sabre is, however, now evaluating what it can do for

Air Canada


, with an eye toward bidding for that airline's information technology outsourcing business. Air Canada belongs to the

Star Alliance

partnership, which competes directly with the


partnership American belongs to. The spinoff may improve Sabre's chances of winning that business.

The 83% secondary offering should also improve Sabre's liquidity, attracting institutional investors at the same time. With only 18% of shares currently available, it does not take much demand to move the stock. And Sabre is a stock that needs some help, as it's been down for a variety of reasons.

For one thing, there's been a glut of new online travel distributors going public recently, such as


(EXPE) - Get Report



, both in November, and Spain's

Amadeus Global Travel Distribution

in October, all at the same time that


has come of age. With a much larger supply of travel distributor shares out there, investors have rotated out of some shares to get into the hot initial public offerings.

Also, Sabre has been without a chief executive since Michael Durham's departure at the beginning of September. At the same time, the company's experienced a lack of growth in its information technology outsourcing business and lower bookings growth in the second half of 1999.

The spinoff and the arrival of Hannigan may turn things around. Analysts are encouraged that he is an outsider to the travel distribution business who brings an information technology perspective to Sabre.

Before the spinoff, Sabre will pay its shareholders a one-time cash dividend of $675 million, or approximately $5.21 a share.

AMR made an IPO of an approximately 18% stake in Sabre back in 1996. Since then, Sabre has developed its subsidiary,

, an online travel service. It was announced in early October that Travelocity would merge with

Preview Travel


. That deal is expected to close towards the end of the first quarter of next year. Sabre will own 70% of that company.

Despite the spinoff, Sabre will continue to furnish American Airlines with all of its information technology needs, including reservations and flight operations, through 2008.