I’ve said it here before; I do not get this JetBlue/Spirit merger plan. That, however, is completely irrelevant when it comes to saying whether Spirit should accept JetBlue’s offer or if it should go with Frontier. If I were on Spirit’s board, I would take the JetBlue offer in a heartbeat, but the board has chosen a different path even after JetBlue upped the protections in its offer. Spirit says Frontier’s offer is better, because the JetBlue deal might fail to pass antitrust review. I’m curious just how many shareholders would disagree with that sentiment.
From a pure compensation perspective, JetBlue’s offer for Spirit is far superior to Frontier’s. JetBlue’s offer is for $33 per share in cold, hard cash. Frontier’s offer is for $2.13 per share in cash but then 1.9126 shares in the new company for each share of Spirit held. The stock price varies a lot, but at last check yesterday it was at $21.40, so if that holds, it’s $23.53. That means the JetBlue premium is about 40 percent higher right now.
Wall Street certainly loves this deal, because when Spirit shot it down, its stock tanked nearly 10 percent. Though to be clear, Wall Street only loves this deal in one direction. JetBlue saw its shares rise more than 2 percent on the hopes that this deal won’t happen. Today’s perspective, however, isn’t about JetBlue. It’s about Spirit since that’s the airline that holds all the cards.
In a letter that JetBlue sent to Spirit last Friday, it upped its offer and had some pointed words for Spirit.
Acquiring Spirit has been a strategic objective of JetBlue for many years and, as such, we were disappointed that the Spirit Board of Directors (the “Spirit Board”) elected not to have any discussions with us prior to the announcement of Sprit’s transaction with Frontier Group Holdings, Inc. (“Frontier”). This lack of engagement regrettably resulted in Spirit entering into a transaction with Frontier that clearly does not maximize value for Spirit’s stockholders.
In other words, JetBlue was waiting for Spirit to call, and it never did. I’m told there were no formal discussions prior to this current offer, but the way this is worded makes it sound like Spirit knew JetBlue was happy to chat. But that’s all water under the bridge anyway. The bigger issue is how it’s going now. JetBlue cites several issues, but this sums it up nicely.
By not receiving access to the basic diligence information that was provided to Frontier, and that we requested in order to finalize a proposed transaction, we firmly believe your stockholders are being disadvantaged.
JetBlue is trying to position this as an effort by Spirit’s board to create an unfair playing field and biasing its decision toward the Frontier merger. Whether that’s true or not isn’t known, but the outcome here is quite perplexing.
The reality is that JetBlue’s offer requires absolutely no faith in the strategy or success of any merger plan whatsoever. If it did, I’d probably feel differently. But this is pure cash. If I’m a shareholder, give me the money and I will walk away happy, not caring what you do with the airline once I’m gone… much happier than with Frontier which would require the airline to perform insanely well to get its stock up to a point that would make me whole. That’s not happening anytime soon.
The one major concern if I’m a shareholder is whether or not this deal with JetBlue can actually be completed or not. Will it pass antitrust review? Will anything? The government is pretty unhappy with mergers these days in general, and it will try to find a way to stop anything it can.
JetBlue has presented a whole bunch of arguments as to why its proposal is better suited to earn government approval than Frontier’s, but it has also put some hard measures in place to help make Spirit feel even more comfortable.
- JetBlue will pay a $200 million reverse break-up fee if the government shoots down the merger on antitrust concerns. Frontier has no reverse break-up fee in the merger agreement.
- JetBlue “will proactively offer to the DOJ a remedy package that contemplates the divestiture of all Spirit assets located in New York and Boston… as well as gates and related assets at other airports, including Fort Lauderdale.”
- JetBlue says it will go even further than that, offering to divest assets “up to a material adverse effect on Spirit, with a limited carve-out to this divestiture obligation for actions that would represent a ‘Burdensome Condition’ under JetBlue’s Northeast Alliance.”
This sounds pretty good to me. Spirit gets to take the money and run. And if JetBlue can’t get the deal done thanks to the feds, Spirit walks away with $200 million. You think Bill Franke, the architect of the Frontier/Spirit merger isn’t going to be there waiting for a deal if that happened? He might try to cut down the price as punishment for Spirit straying, but ultimately if he wants the deal for Spirit now, he should want it if the JetBlue deal fails to pass review later.
Despite all this, Spirit put out a press release saying, “nah, we’re good.”
What it really says is that the board has unanimously agreed that it thinks Frontier’s is a better deal. And why? Well, “the Board determined that the JetBlue proposal involves an unacceptable level of closing risk that would be assumed by Spirit stockholders.”
In a sense, I get this. It’s not anything that would make rational sense, but the feds absolutely hate American, Delta, and United. So, if the feds can find a way to use the Spirit merger approval to break up the American/JetBlue Northeast Alliance, I’m sure they would do so. And if JetBlue decided that was too much to ask, it could sink the deal. But even this is a stretch, and remember, worst case scenario, Spirit walks away with $200 million and can run back into Frontier’s arms.
I really don’t understand Spirit’s rationale here. If I’m a stockholder, which I’m not, I’m really unhappy about this. I can imagine lawsuits flying over this one, because it’s just a lot of money left on the table.