Yesterday Spirit Airlines shareholders rejected an agreement to sell to Frontier with JetBlue offering far more money.
Now Spirit’s board has agreed to sell to JetBlue under similar terms as the New York-based carrier’s last offer – a price 40% higher than Frontier was offering at the time it was made a month ago.
- $470 million breakup fee if the deal falls apart over anti-trust. Spirit shareholders can pocket $400 million of that money, the company gets $70 million, and shareholders still own the company and can re-sell it.
- Prepayment of $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.
JetBlue’s deal is worth over $33.50 – JetBlue estimates $34.15 but that’s based on the merger not closing until mid-2024 (!).
Ironically Spirit’s assets should be worth less to JetBlue than to Frontier, since JetBlue will (1) earn less off of those assets [the ultra low cost business model is higher margin than JetBlue’s] and (2) face higher costs, giving many Spirit employees wage increases, and investing in aircraft interiors to bring them up to JetBlue standard.
Meanwhile they’re heavily incentivized to get the deal done, both because they want Spirit and because it will cost them $400 million if they can’t close for anti-trust reasons. That gives the federal government huge leverage in its separate suit to kill the JetBlue-American Airlines Northeast Alliance.
JetBlue has already agreed to divest conflicting assets like Spirit slots in New York and gates in New York and Boston, which are some of Spirit’s uniquely valuable assets, making the deal less useful to JetBlue’s airline business going forward (though reducing the net cost of the transaction).
If the government uses approval of this deal as leverage to get JetBlue to walk away from or limit their American Airline partnership that makes both of those carriers less effective competitors in New York. It reduces competition in the most important air market in the country. It’s a gift primarily to Delta, which also benefits in Boston, but also to United, crippling American Airlines in Manhattan and coming at the expense of consumers flying to and from the Northeast.
There’s little question that JetBlue is overpaying, a classic case of winners curse. They’ll be distracted by this acquisition for years and hampered by its associated costs, while the carrier’s operational challenges remain and potentially amplify from trying to integrate Spirit into its systems.
Winners and losers:
- JetBlue shareholders: losers
- Spirit shareholders: winners
- United and Delta: winners
- American Airlines: loser
- (Update, I should have added) Frontier: potential winner, because any DOJ deal to proceed with the merger will involve divesting slots and gates at congested airports and likely a requirement that those go to a low cost carrier… like Frontier. The carrier can pick up premium Spirit assets without the merger expense.
It didn’t take long for the Spirit Airlines board to reverse course from claiming that the JetBlue deal was bad for shareholders. They were extremely negative on it, and now they’ll be bullish on it. Life moves pretty fast sometimes.
