JetBlue wants Spirit Airlines shareholders to vote against merging with Frontier Airlines. They’ve reiterated their offer of more money to buy Spirit. They’ve reduced their offer from $33 to $30 per share but are dangling an additional 10% – back up to $33 per share in cash – subject to negotiation and due diligence. JetBlue’s open letter to shareholders (pdf) is worth reading.

JetBlue offers you $30 per share in cash, representing a 60% premium to the value of the Frontier transaction as of May 13, 2022 (1), a 77% premium to Spirit’s latest closing price (2), and a 38% premium to Spirit’s unaffected share price(3)

…Given [the Spirit Board’s] unwillingness to share necessary information or negotiate in good faith, we adjusted our price accordingly, but will work towards a consensual transaction at $33 per share, subject to receiving the information to support it.

JetBlue’s offer is for substantially more money than Frontier’s offer. It does not provide greater certainty, as they claim, though. There is more regulatory risk though it’s difficult to evaluate exactly how much. There should be a path to solve this though through negotiation if JetBlue is as confident in closing the transaction as they claim: a higher breakup fee.

JetBlue Is Already Offering To Overpay For Spirit

JetBlue is offering more money for Spirit than Frontier, and clearly (1) more money than Spirit is worth while (2) Spirit should be worth more to Frontier than it is to JetBlue.

Spirit and Frontier have the highest margin businesses in the airline industry. JetBlue has had one of the lowest margins. JetBlue plans to take Spirit’s profitable assets and use them in a lower margin business than they’re used today, and a lower margin business than Frontier would have.

Indeed, Frontier would continue using Spirit’s assets in a profitable ultra low cost carrier model, while JetBlue is simply looking to buy Spirit for parts – planes, pilots, gates and slots.

If JetBlue were to succeed it would be a clear example of winner’s curse. Market participants know what Spirit is worth, and the winner in an auction is the one that’s willing to overpay.

The JetBlue argument underlying its offer is that its offer doesn’t exceed Spirit Airlines cash plus the book value of its fleet. The market doesn’t come close to valuing Spirit that way now under a more profitable model than JetBlue has. Take on merger costs and fleet reconfiguration costs, and shift those assets to a less profitable business model, and Spirit’s assets become worth less not more.

JetBlue’s Attack On The Spirit Airlines Board

JetBlue claims Spirit’s board is acting in their own interests, and that of Bill Franke, not shareholders. They point out that a majority of Spirit board members remain board members under a Frontier deal.

Frontier is owned by Bill Franke’s Indigo Partners. Indigo used to be the major shareholder of Spirit, and Franke appointed Spirit board members including its Chairman. Bill Franke is the king of low cost carriers and his mentees have run American Airlines for the past 8 years as well.

The Concern Is That A JetBlue Transaction Won’t Close

JetBlue is offering Spirit shareholders substantially more than Frontier is. But if the deal doesn’t close, Spirit just gets the breakup fee and may not get the Frontier offer.

The Administration is currently suing to unwind its Northeast Alliance with American Airlines. A Spirit deal gives the a better case, and new facts since the government actually approved that alliance. The government would never have approved American+JetBlue+Spirit.

JetBlue says that the Northeast Alliance is irrelevant because it goes to trial before a Spirit deal closes. Either they keep the Alliance or they don’t and that’s independent of their acquisition of Spirit.

However they’ll have federal government concerns with acquiring Spirit either way, and those concerns go up if the government loses the trial against the Alliance.

There have already been concerns expressed over the Spirit-Frontier deal, so there definitely would be with Spirit-JetBlue which removes Spirit’s fleet from an ultra low far model. There are far more planes offering the lowest fares in the market with Spirit-Frontier than with Spirit-JetBlue.

JetBlue has agreed to divest assets to close the Spirit transaction and that helps, but doesn’t come close to guaranteeing that the transaction passes muster.

Spirit Should Negotiate A Deal With JetBlue – With A Higher Breakup Fee

JetBlue says their deal is win-win-win but it’s not. Spirit shareholders get a $200 million breakup fee if the transaction isn’t consummated. That’s not nothing, but in a $3.6 to $3.9 billion transaction that’s relative chump change.

Given that the concern isn’t the price – JetBlue is already offering far more money, offering even more ‘with negotiation’ makes it hard not to negotiate at least to avoid shareholder lawships but doesn’t address the real problem with the deal.

Spirit’s board, acting in the best interests of shareholders, should negoitate but the negotiation shouldn’t be priarily about price (which is already far higher than the next-best deal) since a higher price gets them nothing if the deal doesn’t close.

Instead the Spirit board should negotiate over the problem with the deal, which is likelihood that the transaction happens. They should agree to sell to JetBlue if JetBlue substantially increases its breakup fee.

This Latest Effort Isn’t Serious

JetBlue isn’t going to succeed with a reduced offer for Spirit. They had previously offered $33 per share, but they’re now asking shareholders to reject the Frontier offer with a lower $30 offer on the table – only offering the potential to bring it back up to $33 through negotiations.

Perhaps at this point they’re just looking to position themselves as having made a play, and that Spirit made a poor choice, rather than actually closing a deal. They could be playing spoiler to Frontier.

JetBlue was clearly overpaying at $33, and maybe they’ve finally realized that. So they argue against a Frontier deal, if Spirit shareholders reject it they can buy Spirit for less. And if Spirit shareholders move forward they can say they tried and save face.

How A JetBlue Acquisition Of Spirit Affects Customers

JetBlue acquiring Spirit takes planes out of the ultra low fare model. That means fewer seats being sold at Frontier/Spirit-level fares. And it means fewer low fares that compete against legacy carriers. That’s not great for consumers.

At the same time JetBlue says when they enter a market, fares fall more than when Spirit does. When any new entrant adds capacity to a market the greater supply of seats will tend to reduce fares, and Spirit often enters with limited service. But the issue here isn’t incremental Spirit Airlines service it’s taking all of Spirit Airlines out of the equation from existing service.

JetBlue does offer a better product than Spirit, and says they’ll retrofit Spirit planes – which means more legroom and seat beack entertainment.. That’s good for consumers, though Spirit’s Big Front Seat is a strong value currently.

There’s also the chance that JetBlue takes a government deal to keep its Northeast Alliance with American, walking away from the transaction for the breakup fee. Though it sure seems right now like they want Spirit more, if they saw the potential of not having either one they might take that deal. Losing the Northeast Alliance is bad for consumers because it means less competition with United and Delta in New York.