American Airlines is challenged in competing with low cost airlines like Frontier and Southwest. American decides to buy their way into the low cost leisure travel business by buying Spirit Air.  You are the VP of Corporate Development for American,  and your CEO has asked you to study the possibility of buying Spirit.

Goldman Sachs, your investment bank, has provided you with a projection of Spirit’s future EBITDA forecast:

     2020: $100M                        2022: $115M         2024: $125M

     2021:  $110M                       2023: $120M

Your internal team has identified potential revenue synergies of $15M per year and cost synergies of $30M per year, the latter based on combined jet fuel purchases and maintenance.  These synergies won’t start until 2021 since the deal won’t close until 12/31/20

Goldman Sachs tells you that they think Spirit might sell for a 20% premium over the Base Value

1. Would you recommend buying Spirit to your CEO?  (assume AA’s discount rate (weighted average cost of capital or WACC) = 12% and ignore perpetuity value after year 5). Show your math below

2. Independent of your valuation answer in above, what other reasons might you use to argue for buying or not buying Spirit?