When Frontier Airlines raised its offer to buy Spirit Airlines and gave the Spirit Airlines board cover to again endorse a merger between the two airlines (walking away from a much bigger offer from JetBlue that faces greater anti-trust scrutiny) it seemed like game over. The new offer even got the endorsement from two independent proxy advisory firms.
JetBlue isn’t done though. They’ve come out with a new, increased offer in advance of Thursday’s Spirit Airlines shareholders meeting, a last ditch effort:
- Increase the breakup fee from $350 million to $400 million if the deal falls apart over anti-trust. JetBlue’s offer is much bigger. The only reason not to take it is a bet that the federal government keeps it from closing. But if that’s so certain, it’s hard to argue against taking JetBlue’s $400 million and then re-shopping the airline in a year.
- Prepayment goes up o $2.50 per share payable as soon as Spirit’s shareholders approve a deal
- The longer the deal takes to close, the more Spirit shareholders get. Spirit shareholders would receive an additional 10 cents per month starting from January 2023 through date of closing or deal termination, though the first $1.15 counts against the breakup fee.
Frontier’s deal is worth $22.03 per share of Spirit stock at Monday’s close. That’s below Monday’s closing price for Spirit shares of $22.57. Spirit was down almost 8% on the day with the market closing in on the Frontier acquisition happening.
Meanwhile JetBlue’s deal is worth over $33.50 – JetBlue estimates $34.15 but that’s based on the merger not closing until mid-2024 (!).
Spirit shareholders vote on the proposed Frontier transaction. Spirit is substantially-owned by institutions on behalf of smaller investors. It will be up, in large measure, to the Vanguards and iShares of the world.
Clearly though the combined company is more valuable to Frontier than it is to JetBlue, yet JetBlue is offering to pay over 50% more.
- JetBlue has had a less profitable business model than either Frontier or Spirit. JetBlue plans to convert Spirit’s assets from that more productive use to their less productive one.
- They’re not buying Spirit’s assets to leverage their more profitable model or expertise. They’re just buying it for parts (planes, gates, slots, pilots)
- Meanwhile they’re committing to give up some of Spirit’s most valuable assets in gates and slots in New York and Boston
- Meanwhile JeBlue will wind up raising wages for many Spirit employees, and incurring capital expenses to retrofit planes.
- And there’s a good chance the federal government leverages any settlement to approve JetBlue-Spirit to kill JetBlue’s Northeast Alliance with American, making them choose one or the other.
There’s little question that JetBlue is overpaying. Frontier ‘took them off the hook’ for bidding too much for the assets to begin with. They couldn’t declare victory and go home, they had to make one last effort and increase their offer further.
A JetBlue victory would be the ultimate example of winner’s curse. There’s a reason Frontier’s offer isn’t anywhere close to JetBlue, and no third party has come in to outbid Frontier or come close to JetBlue for Spirit.
