A June 30 stockholders meeting of Spirit Airlines (NK, Fort Lauderdale Int'l) is likely to vote in favour of a merger with Frontier Airlines Holdings, parent of Frontier Airlines (F9, Denver Int'l), following a unanimous recommendation from the budget carrier's board of directors.

This follows improved terms offered by Frontier Airlines to the merger agreement with Spirit Airlines, which includes nearly double the per-share cash consideration of a prior agreement with Frontier, commented Spirit Airlines President and Chief Executive Officer Ted Christie.

Frontier Airlines and JetBlue Airways (B6, New York JFK) are embroiled in a bidding war for Spirit Airlines, JetBlue having sweetened its offer by USD2 to USD33.50 per share in cash. However, after carefully reviewing the terms of JetBlue's revised proposal received on June 20, 2022, the Spirit Airlines Board advised against it, saying it was sure to face regulatory uphill.

"The Board believes a merger with Frontier is the most financially and strategically compelling path forward for Spirit stockholders and has a greater likelihood of closing," the airline said in a statement.

The terms of the amended Frontier deal are as follows:

  • Frontier will increase the per-share cash consideration payable to Spirit stockholders from USD2 to USD4.13, in addition to the per-share stock consideration of 1.9126 shares the carrier previously agreed to pay to Spirit stockholders;
  • Frontier has also agreed that USD2.22 per share will be prepaid to Spirit stockholders on a record date to be determined as a cash dividend following approval of the transaction;
  • Frontier will increase by USD100 million its reverse termination fee to USD350 million to Spirit in the unlikely event the combination is not consummated for antitrust reasons;
  • The number of directors of the combined company to be named by Frontier will increase by one and the the number of directors of the combined company to be named by Spirit will decrease by one.

Under the revised terms of the Frontier merger agreement, the pro forma value to Spirit stockholders by 2024 could exceed USD50 per share, driven by combined synergies, airline sector recovery, and the ongoing growth of both airlines.

Based on work done by Spirit advisors, this assumed:

  • Realisation of USD500 million in annual net operating synergies;
  • The pro forma company trades at a price-to-earnings multiple of 11x, based on Spirit's 2017-2019 pre- pandemic average;
  • In addition to the substantial future value creation available, Spirit stockholders would receive the benefit of a near-term cash dividend following approval of the transaction at the Special Meeting on June 30, 2022.

Spirit Chairman Mac Gardner said a merger with Frontier posed less regulatory risk and increased competition in the industry. "The Board is confident a merger with Frontier is the most financially and strategically compelling path forward for Spirit stockholders, with more certainty and the strongest likelihood of closing."

In contrast, the JetBlue transaction faced "significantly greater regulatory impediments than a Frontier transaction". Spirit did not believe that a JetBlue transaction would overcome regulatory objections.

"Spirit has long taken the position that excessive consolidation in the airline industry over the last two decades has resulted in the three legacy airlines dominating domestic air travel. Merging Spirit into JetBlue and its Northeast Alliance (NEA) with American Airlines (AA, Dallas/Fort Worth) will exacerbate regulators' valid concerns over airline industry concentration. The proposed Spirit/Frontier combination will, by contrast, create a stronger, more relevant, and more effective nationwide ULCC challenger to the dominant carriers.

"JetBlue has made it clear that it is committed to the NEA, which Spirit believes is an anti-competitive and unlawful de facto merger between American and JetBlue that aligns JetBlue's interests broadly with a legacy carrier. Spirit believes the existence of the NEA makes it even more unlikely that JetBlue's acquisition of Spirit will be approved. Indeed, the Department of Justice (DOJ) has sued to block the NEA between JetBlue and American Airlines on the grounds that the NEA is anticompetitive, which further increases the regulatory risk of JetBlue's offer to acquire Spirit and the likelihood that the DOJ will be able to block a JetBlue/Spirit combination.

"Although JetBlue's revised offer purports to provide improved regulatory commitments, JetBlue has insisted on maintaining a significant carve-out allowing JetBlue to refuse to take actions needed to gain regulatory approval if – in JetBlue's sole and absolute discretion – any such actions would materially and adversely affect JetBlue's anticipated benefits under its NEA venture with American. This broad carve-out creates an unacceptable risk for Spirit stockholders and only confirms that JetBlue will prioritise the NEA over the completion of a transaction with Spirit," the airline concluded.

Meanwhile, JetBlue has maintained that its revised offer is "decisively superior to the Frontier transaction, even considering its revised terms, and it continues to offer Spirit shareholders significantly more value, more cash, more certainty, and more regulatory protections". It said its USD33.50 per share in cash offer is "a very significant 38%1 premium to the implied market value of the amended Frontier transaction". "Also, importantly the incremental USD2.00 per Spirit share offered by Frontier are effectively being paid by Spirit shareholders through their ownership in the combined company, therefore resulting in only approximately USD1 of incremental economic value."

"We will more thoroughly review and assess the revised terms of the Frontier-Spirit merger agreement, and we intend to continue our "vote no" campaign against the inferior Frontier transaction at the special meeting," the airline said.