Prospects Continue to Dim for the Frontier/Spirit Merger

Frontier, JetBlue, Mergers/Finance, Spirit

Since the day it was announced, Spirit’s board has been 100 percent behind its merger deal with Frontier. Even when JetBlue entered with a bid of its own, it seemed like the Frontier deal would not be stopped. Now, it’s looking less and less likely every day.

Last week, Spirit postponed the shareholder vote on the Frontier merger for the third time. The original vote was scheduled on June 10, but it was delayed until June 28 and then July 8 before this latest postponement to July 15. What’s behind the delays? There is only one possible reason.

While Spirit’s board has been fully behind the Frontier merger since the beginning, what they want doesn’t matter in the end. It’s all about what the shareholders want to do. And so far, shareholders appear to be tellng Spirit that they want something else.

Shareholdings in Spirit are largely consolidated with big instituational investors. At the top you have Vanguard with more than 9 percent of the company followed by BlackRock with 5.73 percent. The top 10 owners control just shy of 40 percent of the airline’s stock. Another 19 percent is owned by top mutual funds.

In other words, this isn’t about going out to Ma and Pa with a flyer and convincing them with a broad campaign that this is the right thing to do. This is all about making sure that those handful of companies that control the fate of the company are behind you as a board, and that is clearly not the case today. If it were, the vote would have been held and the deal would be done. Instead, Spirit must not be able to get the votes it needs, so it keeps postponing and postponing and postpoing, hoping something will change.

In the earlier postponements, there was some sense behind this. Spirit has been able to go back to Frontier to get a sweetened deal as JetBlue continued to push higher and higher with its own proposals. Shareholders will appreciate that kind of delay since it’s short and means more money in their pockets.

But at some point, this becomes a weird game where Spirit’s board proverbially holds its breath until it gets its way. The problem is, the shareholders don’t care if the board suffocates, at least not as much as they care about getting the best return on their investment.

With this latest delay, is there actually a revised deal coming from Frontier? It’s been awfully quiet in the last week. Presumably that’s because JetBlue is feeling good about its chances and Frontier has been unwilling to come up more. If Frontier does, in fact, change its deal again, then this delay may have been worthwhile. If not, then it feels like a desperate attempt by Spirit to hope the winds will shift.

Maybe Frontier is just waiting until closer to the vote so JetBlue will have less time to come back with another increased offer of its own. Or maybe Spirit is deep in negotiations with Frontier to try to get it to come up since it obviously so greatly prefers that deal. Either way, if no changes come out this week, then it would seem the vote would have to be held even if it means a rejection of the Frontier deal.

If that deal is shot down, then what? The merger agreement with Frontier does include a $94.2 million break-up fee. Spirit would not answer questions about whether this would have to be paid due to a shareholder vote against the deal. A look at the merger agreement would suggest that it does not get paid out in that event… but… if Spirit enters into an agreement to be acquired by another company within 12 months, then I believe it would have to be paid. That, however, is not guaranteed to happen.

A “no” vote on the Frontier deal, after all, does not mean that a JetBlue deal is done. Spirit could just decide to stick it out on its own, try to keep its head down, do good work, and then hope for a strong increase in its share price so that it can get a better deal from someone down the line. Or it could give in to pressure and agree to be acquired by JetBlue. Ultimately it will probably depend upon those top shareholders to decide in which direction the company gets pushed.

For now, however, we all just wait… and wait… and wait. Every time the vote gets delayed, the board seems to lose some credibility. But as long as ever-increasing offers continue to roll in, no shareholder is going to complain. Frontier has already come up more than I would guessed, but it’s hard to imagine there being much more room to increase here.

Does that mean we will finally see a vote this week? Your guess is as good as mine. I’ve given up trying to guess at this point. But I sure hope this saga ends soon.

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22 comments on “Prospects Continue to Dim for the Frontier/Spirit Merger

  1. 1. Where the hell is JetBlue getting all this money.

    2. Either way Frontier is gonna survive and thrive.

  2. Every time I see this story it makes me wonder about Spirit’s board, and whether there is really an arms length relationship between them and frontier.

    With the board so obviously supporting one bid, but again obviously not being able to sell that to the shareholders, it makes you wonder. Seems like the merger with frontier is good for the board and their interests, but maybe not so good for the shareholders.

    The whole thing just seems a little slippery. Regardless of what you think of JetBlue, or even their ability to make this work.

    1. Agreed..

      Given how bad delays, cancellations, and general operational reliability has been in the past six months (and, perhaps even more more importantly, how much media coverage those issues have received), I’m also concerned about how much management attention (at all three companies- Frontier, JetBlue, and Spirit) is being directed towards the merger/takeover battle and related due diligence & negotiations, as opposed to focusing on the basics of getting people from A to B safely and reliably.

      The drawn-out battle also can’t be great for morale of the rank and file employees, given the FUD it creates and how stressful customer-facing positions at airlines must be these days.

      1. Kilroy – Just one point of clarification… Spirit and Frontier are actually running pretty good operations. Jetblue, well, that’s a different story.

        1. That’s a fair point, Cranky, and I appreciate that clarification.

          Perhaps I should have made it a more general comment (“as opposed to other strategic company priorities/initiatives”), and pursuing the merge/takeover/corporate battle/whatever-one-calls-it may well be a “very good” use of management’s time, but executive attention/focus is always a finite resource.

        2. Amen to that. They’re horrible and the thought of them integrating with another carrier is laughable.

          Their management has no concept of strategic vision.

          1. JetBlue is trapped in the NE, without enough planes or people to build a significant presence elsewhere. Being so tied to the NE means they have very high unit costs and they are also overly subject to localized storms, and that can kill their operations.

            The other carriers (except Alaska) are spread enough out that while a storm will hurt, it doesn’t shut them down for the most part. And Alaska is heavy in an area that rarely deals with storms bad enough to shut airports down.

            JetBlue’s reasons for this acquisition are they are basically buying 180 airbuses and 3,000 fully trained pilots. That will give them the staff and equipment to finally grow their way out of the NE. Now…how will they make use of these? If they win the battle, they better have a plan.

    2. “Every time I see this story it makes me wonder about Spirit’s board, and whether there is really an arms length relationship between them and frontier.”

      That is because there isn’t one. If I recall reading here, Bill Frankie was associated with Spirit & now being with Frontier he has retained some degree of influence to this day.

      “The whole thing just seems a little slippery. Regardless of what you think of JetBlue, or even their ability to make this work.”

      Exactly John G.

      1. Really? Have you looked at Ted Christie’s resume? He was CFO and Senior Vice President of Finance at Frontier from 2002-2009! There are others! Staffing wise, management has a lot of crossover between F9 and NK.

        However, I think JBs tie with AA may have something to do with the JB’s offer. NK is huge in the Caribbean and have significant traffic in Central and South America. I would be willing to be, with the JB/AA tie-up, AA could be behind JBs chase for NK. They did say they would eliminate a majority of the routes.

  3. The unwillingness of Spirit’s board to hold the vote indicates that either

    (a) they know JetBlue will win and are buying Frontier more time, or

    (b) neither bid has a majority, with a group of shareholders either supporting Spirit going it alone against a stronger future offer, or supporting the JetBlue bid but preferring to wait until the legal uncertainty around the NEA is resolved before committing, to keep the Frontier option open until they have a clear idea of what’s going to happen with B6 and AA.

    Spirit going it alone is a viable option – the operation is generally solid and their only real cost challenge is the lack of fuel hedging.

    1. The currently delayed shareholder vote is only for or against the Frontier transaction. The JetBlue transaction isn’t up for vote by the Spirit shareholders.

      The letter from Frontier’s executives up thread does state that there aren’t enough votes for the Frontier purchase.

  4. If the only factor were financial, the JBLU offer was superior from the beginning but SAVE has long said and many analysts have supported the notion that getting a deal over the finish line – i.e. approved by the DOJ so a merger or acquisition can close – is all that ultimately matters.

    The JBLU proposal to acquire SAVE has always been unlike anything else the airline industry has ever seen for reasons that have been more than adequately discussed and which reduce the likelihood of approval by the DOJ. Factor in the lack of clarity regarding the future of the NEA and it is not a surprise that a lot of investors aren’t willing to show a preference for one proposal or the other – because doing so essentially cuts off the other option as well as “everybody remains single.”

    JBLU’s ticking fee does change the calculations because it is possible for SAVE shareholders to support the transaction, get paid while JBLU fights for it, and then be able to return to their original place – if that is possible in life or business – if the deal gets shot down. JBLU is willing to throw a lot of cash – unlike any other airline merger or asset acquisition and unlike in most other industries – to try to do a deal that will likely require significant alterations to be approved by the DOJ. For SAVE shareholders, the deal is simply about how and how much they gain with no concern for whether the merger will ever produce the results that JBLU says it will. A stock merger like with Frontier depends on the viability of the business plan. The fact that ULCC is proposing a stock merger while JBLU is proposing a cash acquisition will result in very different measurements of whether the objective is achieved.

    The DOJ will measure either deal based on the impact to consumers; while they haven’t weighed in, the DOT – which does have some antitrust enforcement – made it clear with the Newark “slot” awards that they do not believe JBLU is a better choice for consumers – which speaks loudly to the likelihood of the future of the SAVE/JBLU deal.

    Frontier is not willing to spend a bunch of money chasing a deal which JBLU cannot ultimately win. If JBLU is willing to spend a bunch of money pursuing a deal which cannot lead to the merger of two intact companies, then Frontier is undoubtedly willing to sit back and watch it all play out.
    The sad part in watching all of this is that all 3 of those airlines are in some of the worst financial shape among US airlines right now; failing to get a deal done ultimately hurts all three and shifts the power in the industry back to the big 4 which any of the 3 airlines involved in this merger is supposed to keep in check.

  5. The DOT does have jurisdiction over slots, international routes, and other transportation-related regulatory matters, But that’s not anti-trust law. Only the DOJ can sue to stop a merger on anti-trust grounds – and it has to sue to do that. It can’t unilaterally block a transaction. The DOJ is not the CAB.

    Tim Dunn wrote: ” Frontier is not willing to spend a bunch of money chasing a deal which JBLU cannot ultimately win.”
    To which I respond, Your observation is only partially right in my opinion (which is all this is). I agree with CF that Frontier is wise to limit the amount it’s willing to invest in Spirit, and is willing to walk away from a deal that doesn’t make sense to it. But that doesn’t automatically mean that JetBlue can’t win an anti-trust lawsuit if (repeat if) the DOJ files one.

    Neither you nor I have any proof that DOJ will file suit or that a judge will block a possible merger – and neither do any of the Wall Street analysts. It’s all speculation at this point. The DOT action on Newark slots has virtually nothing to do with anti-trust laws. Spirit had to go to court to get the DOT to reallocate the Newark slots.

    None of us knows if the DOJ will win its lawsuit to block the NEA – if it even gets to trial. Most of the opinions on that are based on wishful thinking regardless of where an individual stands on the issue.

    Litigation on both of these potential lawsuits could last for a number of years. Does DOJ really want to take that risk? It might. What will happen if a more business-friendly president and Congress are elected in 2024? Would the potential appeals be dropped? No one knows any of these things. In my opinion, those questions are why these kinds of lawsuits are usually settled. As the old saying goes. “You’re better off with the devil you know than the devil you don’t.”

  6. Please dear God, make B6 the winner. We FLL flyers need more B6 routes to compete with the WN cattle car.

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