With only 10 days to go until the now-rescheduled shareholder vote, JetBlue has effectively torpedoed the Frontier/Spirit merger as it stands by bumping its own offer up again. Unless Frontier is willing to make big changes, I’d say that deal’s chances are looking worse and worse by the day.
Spirit had planned on having a shareholder vote on the Frontier merger on June 10, but with the odds looking worse that it had the votes it needed, the airline decided to postpone the vote until June 30. With shareholders not sold on Frontier’s deal providing the most value, Spirit had to go back to the table to do more work.
It provided JetBlue with the same information it had provided Frontier, and JetBlue had always said that it would go back up to its original $33 per share offer in all cash if that happened. JetBlue did that and more. It has now boosted its offer to $33.50 per share which still includes the $1.50 pre-paid breakup fee. In other words, shareholders get $1.50 per share just for approving the deal and it’s theirs to keep. Once the deal is completed and regulators approve, they’d get the remaining $32 per share.
JetBlue also put a stronger commitment to getting the deal through regulators into writing. As the airline said in its press release:
JetBlue’s June 20 proposal includes a significant enhancement to its prior proposals through an obligation to divest assets of JetBlue and Spirit up to a material adverse effect on the combined JetBlue-Spirit, with a limited carve-out to this divestiture obligation for actions that would be reasonably likely to materially and adversely affect the anticipated benefits under JetBlue’s Northeast Alliance. This commitment significantly increases the divestitures JetBlue would be willing to commit to making in order to obtain regulatory approval and meaningfully exceeds the divestiture commitment from Frontier.
Spirit has put a release saying the board will review the proposal, but let’s be honest. The board is just going to go back to Bill Franke’s Indigo Partners — the architects of the Frontier deal — and beg them to do something to improve the deal or it’ll slip out of their hands. And what will Frontier’s response be? If I were a betting man, I’d go with something like this:
Why do I say Frontier would let JetBlue take Spirit? The benefits are just so great… for Frontier. Think about this deal as structured.
From a pure cash standpoint, JetBlue will give $33.50 per share. The Frontier deal is for $2.13 in cash plus 1.9126 shares in Frontier, or rather, the new company it will become. Unfortunately, the markets weren’t open yesterday so I don’t know how they’ll react to the news, but we’ll find out this morning. Based on Friday’s close, that’s hovering in the $20-$21 a share range in current value. On top of that, JetBlue will gift $1.50 per share of that purchase price up front with no questions asked.
So now, if you’re Frontier, what do you do? Frontier most definitely won’t want to go all-cash with its offer. The whole thing is predicated on there being great synergies and growth and all that so that all shareholders will win in the end. But considering the combined value of the deal as it stood on Friday is lower than the standalone Spirit share price, Frontier would have to come up a whole lot to sway the shareholders at Spirit. And there’s just not enough value there for Frontier.
If Spirit goes to JetBlue, JetBlue has gladly committed to giving up all of Spirit’s assets in Boston and New York. Frontier would stand to gain a fair chunk of those when they are divvied up, if it’s interested. And, as we’ve discussed before, the JetBlue strategy is to merge Spirit into the JetBlue way, take seats off airplanes, bring costs up, and try to compete as a tweener with a mix of good service and low-ish fares. All of this is great news for Frontier, opening up the US for it to move in and replace Spirit where its new model won’t work. And it doesn’t even have to give Spirit shareholders anything.
Thinking about it this way, why would Indigo bother increasing the deal price? So far, it has been very hesitant to do anything except add a reverse break-up fee to counter some of the criticism. It expected the deal to go through, so adding that was a minor concession. But so far, the Spirit board has continued to back Frontier’s offer, saying the JetBlue pitch is not a “Superior Proposal.”
With shareholders disagreeing, the Spirit board is backed into a corner. So what happens now? If the board sticks with Frontier as is, the shareholders will presumably vote against that merger on June 30. If the board decides that this is indeed a “Superior Proposal,” that would give Frontier four days to match. I don’t know exactly what a “match” would be considered, but at the very least it would require a big increase from Frontier.
If I were Frontier, I’d just walk away. If I were JetBlue, I’d get my head examined for offering such a deal. If I were Spirit, I’d go with the JetBlue deal. There would be a lot of celebrating at all three airlines if the JetBlue deal went through.