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By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report
Last week's tie-up between Germany's Deutsche Lufthansa AG (DLAKY) and the U.S.-based JetBlue Airways Corp. (JBLU) is yet another example of the kind of foreign investment in prime U.S. assets we've told you to expect and that we see accelerating in 2008.
Sadly, many investors will fail to realize the significance of such transactions until it's too late.
Thankfully, however, Money Morning readers are not part of that group.
So what's the latest in the Lufthansa deal?
In a nutshell, Lufthansa – which happens to be my preferred airline when I head over to Europe – paid $300 million for a 19% stake in JetBlue, a faded Wall Street darling. As part of the deal, the German carrier also gets the right to name a new member to the JetBlue corporate board.
Ostensibly, the deal is about helping JetBlue manage fuel costs that it has so far left unhedged at a time when oil seems destined to eclipse the $100 a barrel mark.
However, there's another angle and, as usual, it's one that has been largely overlooked by the investing masses.
Lufthansa has essentially picked up one-fifth of JetBlue for 70 cents on the dollar, while taking advantage of a transaction that would have cost it more than $400 million when JetBlue was still a semblance of a hot property only three years ago.
Call it a weak dollar play or, depending on your perspective, a strong euro play. Either way, it underscores that Lufthansa is the latest in a long string of foreign entities to capitalize on a weakened greenback while potentially adding significantly to their own bottom line.
This may not be immediately clear but our guess is that Lufthansa would have purchased all of Jet Blue were it not for current U.S. law that limits the foreign-ownership of a U.S. flagged air carrier to less than 50%. That same regulation also imposes separate restrictions on foreign managers making operational decisions.
We also believe that Lufthansa's acquisition really has very little to do with JetBlue's fuel costs or liquidity. Instead, it seems likely that the deal is more in line with Lufthansa wanting another marketing partner to feed its profitable European routes.
In short, this deal provides yet another example of how foreign companies will capitalize on the weaker dollar.
Shrewd, acquisitive companies can pick up companies and other dollar-denominated assets today for pennies on every dollar that they would have had to spend in strong-dollar periods. In doing so now, these firms not only get a bargain, they also create crucial marketing relationships that will pay off in a big way when the U.S. dollar – and the U.S. economy – eventually recovers, as it will.
We expect this trend to continue in 2008 with one notable difference.
The companies acquired will no longer be secondary industries but will increasingly represent the crown jewels of U.S. industry, including many Fortune 100 names that are presently viewed as "untouchable" – either because management contends these firms are "not for sale," or because they're viewed as too big to buy.
As the dollar declines further, both those obstacles will be swept away. With the dollar's decline, the sticker prices of U.S. companies as measured by foreign currencies will actually decline. At the same time, sovereign wealth funds – including the so-called "Middle East Cash Barons" – will watch their coffers grow in size.
When the offers come, it will be the fiduciary responsibility of the managers of U.S. companies to listen. It may not be a matter of whether a company gets sold, but instead will be a decision about whom the company gets sold to – and at what price.
Naturally, this development will raise all sorts of concerns about national security and U.S. economic stability, and there's likely to be a lot of hand wringing from our elected leaders – and from self-appointed civic leaders who don't understand the new realities of global finance.
And much of it will be moot.
With the moves he's made – and some he hasn't, but should have – U.S. Federal Reserve Chairman Ben S. Bernanke has let the cat out of the bag and it's going to be hell to put him back in.
We'll continue to watch this unfold, to update you on what we see, and to look for ways to capitalize on new developments.
News and Related Story Links:
- MarketWatch.com:
JetBlue says Lufthansa to Take 19% Stake. - Money Morning Special Research Report:
Nine Ways to Profit From the Diving Dollar. - Money Morning Investment Analysis:
Sovereign Wealth Funds Biting into the World's Biggest Companies…Transparency and Motives in Question. - Lufthansa.com:
Corporate News Releases.
Tags: Airlines
