Don't Panic, AMR Shareholders! Your Investment Is Still Intact

The bankruptcy of AMR (UNKNOWN: AAMRQ.DL  ) , parent company of American Airlines, has been a wild ride for investors. After seeing shares become nearly worthless following the initial bankruptcy filing, shares rocketed after the reorganization plan called for AMR common shareholders to receive a stake in the new American Airlines Group (NASDAQ: AAL  ) . But a recent development in the American Airlines/US Airways merger has caused many AMR shareholders to panic. Taking a closer look at company documents, these fears are greatly exaggerated and there is likely still significant value left over for AMR shareholders.

Scary press release
The official merger of AMR and US Airways occurred early on December 9 and was quickly followed by a press release from American Airlines Group. The part that had AMR shareholders panicking was this part of the press release:

American Airlines Group has determined that holders of AMR common stock (formerly traded under the symbol: "AAMRQ") will receive, for each share of AMR common stock, an initial distribution of approximately 0.0665 shares of AAL in connection with the occurrence of the effective date of the Plan.

Many investors interpreted this to mean that AMR shares would be turned into 0.0665 shares of American Airlines Group and nothing more. With American Airlines Group shares trading around $25, this would mean AMR shares would only be worth $1.66, a massive drop from their $11.39 Friday closing price.

Clarification
While I certainly believe the market does misprice some securities, it would have to have been way off base to have priced AMR shares at $11.39 if they were only worth $1.66. Turns out, the market was valuing AMR shares much more fairly than many investors had feared. Reading further on in the press release, it states:

AAMRQ holders may in the future receive additional distributions based on the trading price of AAL common stock during the 120-day period after the effective date and the total amount of allowed claims, in each case, in accordance with the terms of the Plan.

Unlike the past bankruptcies of Delta Air Lines (NYSE: DAL  ) and United Airlines, now part of United Continental (NYSE: UAL  ) , AMR shareholders are receiving part of the new reorganized airline. Shareholders of bankrupt Delta and United stock didn't have the same complicated process AMR shareholders are going through because there wasn't enough equity left over to pay Delta or United shareholders anything.

However, AMR shareholders do get a piece of the new airline but are being treated in a way similar to how AMR's other creditors are being treated. Distributions to AMR creditors are being made over the next four months and AMR shareholders are being treated in a similar fashion, after all, they are behind the creditors in line when it comes to payments.

So why does American Airlines Group use the term "may" instead of "will" when it comes to AMR shareholders receiving additional shares? Although American Airlines Group shares are trading well above the level where additional shares begin to be issued to AMR shareholders, American Airlines Group shares could change in value in the meantime.

It would take a major double-digit move downward in American Airlines Group stock to prevent additional shares from being issued to AMR shareholders. Such a downward move would likely require a major event such as an economic collapse or a terrorist attack. Therefore, AMR shareholders are highly likely to receive additional shares under the terms of the AMR reorganization plan but since American Airlines Group cannot 100% guarantee the value of its stock, the press release must say "may" instead of "will" for legal reasons.

Calm down, AMR shareholders
AMR shares are no longer tradable and that is a good thing for the investors who were startled by this press release and would have sold their shares below fair value. And if you don't think airline stocks can't be quickly driven down by false impressions, take a look at United Airlines stock, which plunged from $12 to around $3 back in 2008 after a false rumor that it had filed for bankruptcy spread like wildfire.

It was clearly spelled out in the AMR bankruptcy documents that AMR shareholders would receive 3.5% of American Airlines Group and additional shares if American Airlines Group stock rose higher. In fact, the plan notes that the vast majority of payments to AMR shareholders at this price level for American Airlines Group stock would come in the form of these additional share distributions. We are now well past the level where additional shares begin to be issued. So the 0.0665 shares of American Airlines Group is the first part of the payment to AMR shareholders. And it's time to calm down since chances are there are more shares to come.

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Read/Post Comments (9) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 12, 2013, at 12:01 AM, micpowell wrote:

    Do you still stand by your September article entitled Could the Merger Lawsuit Actually Help AMR Shareholders?

  • Report this Comment On December 12, 2013, at 12:19 AM, micpowell wrote:

    Whoops I see where you are coming from, sorry thx

  • Report this Comment On December 12, 2013, at 11:40 AM, tim8758 wrote:

    You have got to be kidding.

    I have or HAD 5000 shares worth $61,000 dollars on Friday. I held on to them and followed your advise RE: another of your stories that stated that the shares would be worth $12 if LCC was worth $22.

    Today I have 337 shares of new stock, says Scottrade worth about $8400 dollars.

    And you say not to worry. I should have sold on Wednesday or Thursday. So far I have lost $52,000 dollars.

    Sounds like a good class action law suit to me.

    But wait, we dont have to worry, some day, maybe, American MAY step up and make us whole. BULL

  • Report this Comment On December 12, 2013, at 11:47 AM, sjb2323 wrote:

    The distribution would have to come at every interval (30, 60, 90, and 120 days) and be substantially bigger than the initial .0665 per one AAMRQ. I had 2,000 AAMRQ which today converted to 133 AAL. At last trade ($25.92) my AAL is worth $3,447.49. On last Friday my 2,000 AAMRQ was worth $22,780 at closing price of $11.39. That is $19,332 loss or about 85%. $19,332 worth of AAL equates to another 745 shares of AAL they would have to give me just to be at the same value as I was on Friday. That's 186 shares per distribution (30, 60, 90, and 120). Somehow I don't see this happening.

    Fortunately I bought at a pretty low price of $3.15 per AAMRQ so I "may" recoup my initial investment and "may" get a little profit. But NOTHING like the 261% gain I had. I feel like an IDIOT for not selling on Friday. As Cramer would say, "Bulls make money, Bears make money, Pigs get slaughtered." Somehow I hoped the deal would come out a little better for AAMRQ considering the buying interest going into the close on Friday. I feel real bad for those that bought in the $11 range - it will be years, if not decades, before you see a profit. Just my thoughts.

  • Report this Comment On December 12, 2013, at 1:26 PM, iltigo wrote:

    So I guess this means nothing:

    At the time the Plan of Reorganization becomes effective and the merger closes, each outstanding share of US Airways Group, Inc. common stock will be converted into one share of American Airlines Group Inc. common stock and substantially all pre-Chapter 11 unsecured claims against and outstanding equity securities of AMR Corporation will be satisfied by American Airlines Group Inc. common stock or preferred stock in accordance with the Plan of Reorganization.

    So now what? On Monday I had roughly 7 grand in AAL, now my shares are gone and "revalued". Please 'splain Lucy?!?!?!?

  • Report this Comment On December 12, 2013, at 2:00 PM, TulipSpeculator1 wrote:

    @tim8758, @sib2323

    Right now you have the 3.5% of AAL as spelled out in the original reorganization plan. But since common shareholders have to be treated like creditors when it comes to distributions, the rest of the distributions have to happen over the next few months.

    As I stated in the article, AAL cannot legally say additional shares will be distributed because an airline cannot guarantee its share price and therefore additional distributions.

    I highly recommend the following link from Dallas Morning News. The paper has a very good record for AMR/US Airways merger reporting.

    http://aviationblog.dallasnews.com/2013/12/we-have-a-lot-of-...

    If you aren't interested in the report from Dallas Morning News, this link to a report by a managing director at Rothschild should clarify your position.

    http://aviationblog.dallasnews.com/files/2013/12/Homer-Parkh...

    Best of luck and thanks for reading,

    TulipSpecuator1

  • Report this Comment On December 12, 2013, at 9:19 PM, Merlin8971 wrote:

    I must be a bit naive about how things work. If the value of AAMRQ was $11.39 at the close of market trading Friday, I figured that the conversion would be one share of AAL for each US Airways stock and about 0.41 to 0.46 shares of AAL stock for each one share of AAMRQ.

    But it turns out the conversion was 0.0665 or 6.65 shares of AAL for each 100 shares of AAMRQ.

    Where did that number come from?

    The 338 million shares of AAMRQ at $11.39 equates to 4.41932 billion dollars.

    The 0.0665 conversion dilutes the Friday closing value to 293.884 million dollars.

    It is my opinion the 4.41932 billion dollar market value was 1/3 the asset value of AAMRQ.

    Before bankruptcy AMR was trading up around 14 to 15 dollars per share. If I recall correctly they had something above $30 billion in cash and had just placed an order for $35 billion in new airplanes.

    As like everyone I lost 85% of the value after Friday. Will we receive any further value? Personally, I think we are owed much higher value.

    Where did the 0.0665 number come from?

    What I did not like is the fact that there was no stockholder announcement of these terms, and the stock was frozen at the end of trading Friday, the bankrupcy was lifted Friday, the merger happened over the weekend and the announcement of the conversion number on Monday, AND whatever amount of money I actually have due to the merger is STILL frozen.

    Bad Dream: Person get a tip AAMRQ may go another 33% potentially. Buys 1 million shares Thursday at a cost of 11.25 per share. Then all else goes as it did. That person has 1.6625 dollars million today down from 11.38 million dollars invested. Wake me up please!

    This was just a jaw-dropping event. I have been riding this bronco for two years. Yes, I made money because I had a plan and skimmed at intervals (should have sold more at $13.50). There were a number of opportunities to add to the profits if you had the nerve with $1 to $2 moves on a daily basis at times.

    But I did not foresee the remaining shares would drop 85%. It was jaw-dropping.

    And the CEO.....he only gets 15 million and 2 million dollars in shares (now is that before the conversion or after?) as severance pay(?) So given the conversion factor the CEO was REALLY WORTH $261.53846 billion dollars. He should be able to get another job easily since he is worth so much.

    This (at this point) is another example of an answer to CNBC's question, "Why do small retail investors NOT get into the market."

    It is just jaw-dropping.

  • Report this Comment On December 13, 2013, at 3:17 PM, TulipSpeculator1 wrote:

    @Merlin8971

    AAMRQ shareholders are now being treated similar to other AMR creditors since shares are being distributed per the reorganization plan. Like the other creditors, AAMRQ is likely to receive additional payments over the next 120 days.

    Under the reorganization plan, AAMRQ shareholders were guaranteed 3.5% of AAL and it appears this is where the 0.0665 shares per AAMRQ comes from. Based on the current price of AAL shares, shareholders of AAMRQ are expected to receive significant additional distributions (unless AAL has a double digit drop likely requiring an event like a global heath pandemic or a terrorist attack).

    For more information, I highly recommend the links I posted in the comment above yours. One is from Dallas Morning News (which has done an excellent job reporting on the AMR/US Airways merger) and another is from a managing director at Rothschild.

    Thanks for reading,

    TulipSpeculator1

  • Report this Comment On December 26, 2013, at 7:57 AM, bondguy65 wrote:

    It's all about the AAL stock price. In simple terms, the last trading day of AAMRQ was Friday the 9th and that final stock price equates to about $22 per share of AAL. Thus, if AAL stock stays above $22 for the 30/60/90/120 distribution dates you'll be made whole. At the current price north of $26 we're much better off as we not only own a higher value stock but AAMRQ holders will receive more shares as it will take less shares to satisfy outstanding disputed liabilities. Bottom line..if you're going to own a reorg equity you need to understand the plan of distribution. You cannot buy/own and keep your head in the sand as though you own JNJ. Go AAL!

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