Following the latest revision to JetBlue’s offer to acquire Spirit Airlines, the board has reaffirmed its position that the Frontier merger is its best course, but not before an enhancement from Frontier.
JetBlue Revised Its Offer
From the offers made publicly available, the latest offer appears to be JetBlue’s third formal offer to acquire Spirit in the last couple of months. The latest is different in four material ways:
- The Break-up fee increased to $350 Million payable to Spirit if the acquisition is blocked by regulators
- The price per share moved to $33.50, JetBlue’s highest so far
- A portion of that would be paid upfront to shareholders right away
- JetBlue will make some route concessions to satisfy Spirit’s concern about regulatory approval, but will not abandon the Northeast Alliance (NEA) with American Airlines
JetBlue did not mince words in its press release:
“The conflicted Spirit Board continues to rely on a series of mischaracterizations to justify an inferior deal – about the regulatory situation, that is at odds with the views of outside experts that our transaction can get done; about the Northeast Alliance, despite the overwhelming facts supporting its pro-competitive nature; and about the impact of the changing industry environment, including competition for pilots. Adding to these misrepresentations, the Spirit Board is now claiming they have served their shareholders by accepting a revised Frontier proposal, an act which does not change the fundamental superiority of our transaction, agreeing, among other things, in exchange for underwhelming financial concessions, to weaken Spirit shareholders’ governance in the combined company through less board representation.” – JetBlue (emphasis mine)
Spirit’s Board Reaffirms Frontier Merger Remains Superior Offer
Spirit opened its books to both carriers in an effort to offer due diligence. Frontier matched elements of the JetBlue revised offer putting them on mostly even ground. The Frontier merger offered the same breakup fee, paid early to investors just as JetBlue did, and increased the value of the merger for Spirit Shareholders with more Frontier shares as a result of a consummated deal (1.9126 Frontier ULCC shares.) This enhanced deal also comes at a cost of one board seat for Spirit from (5) to (4) board seats with Frontier taking the remaining (8.)
Fundamentally, there are two factors at play that have come up in each of these three rounds ahead of a June 29th, 2022 shareholder vote. The first is that Spirit believes that the DOJ, who is currently suing JetBlue over its Northeast Alliance (NEA) with American Airlines, will be less likely to approve the acquisition, adversely affecting shareholders. The second is that Spirit has a seat at the table with Frontier (in fact it has five seats on the board) and an opportunity to build the country’s largest ULCC and become a true competitor to the Big 4 (American, United, Southwest, and Delta.)
Spirit believes that these are reasons enough to continue with their merger with Frontier.
JetBlue Isn’t Helping Its Case
Viewing this from a JetBlue perspective, every time they enhance their offer for Spirit, Frontier matches (more or less), and the Spirit board shoots down the JetBlue offer. In this instance, JetBlue continues a hostile tone (see the press release above) that Spirit has not matched. So long as the offers continue to be marginally better and within the range of Frontier’s ability to meet the standard, the two carriers get pushed together further.
Spirit has been fairly clear, they do not believe the DOJ will likely approve the acquisition of the carrier folded into JetBlue. They have said everything but this directly in the press. The route concessions it has offered do not address what Spirit has been clear they view as the largest regulatory hurdle.
All the while, the carrier ups the ante for Frontier ever so slightly each time. If JetBlue were to make a substantial offer – say $67/share (twice their current high offer) which analysts and frankly, anyone with a calculator, would consider to be a massive overpayment, then it’s possible that the Spirit board would have to reconsider its position as is its fiduciary obligation. It might get Frontier to overpay for the carrier heading into a possible recession, which could help JetBlue even if the Frontier Airlines-Spirit Airlines merger succeeds.
But that’s not where the three carriers are at the moment. JetBlue could also change the tone of the discussion if it offered to abandon its NEA, meaning that its regulatory approval odds would be greater than they are now. This would be Spirit’s board something material to consider. They won’t do that, though. With DOJ suing JetBlue over the NEA that the carrier says it will not abandon to facilitate their acquisition then there really is nothing for Spirit to consider.
JetBlue continues to make the deal better for Spirit shareholders regardless of which way they vote because Frontier continues to match the deal. The merger with Frontier and Spirit will always make more sense so long as the NEA is in place and throwing more cash at the deal won’t sway Spirit’s board. Ultimately, the breakup fee is important, but not enough to overcome the likelihood (in the board’s mind) that JetBlue won’t be able to get the deal done. An extra $350 million is a great boost for shareholders, but not at the expense of being able to create market efficiencies only possible with Frontier.
What do you think? How will Spirit shareholders vote this week?