On the eve of a scheduled shareholder meeting about its acquisition of Frontier Airlines, Spirit Airlines said Wednesday night that it is voting and will continue to talk with both Frontier and its rival, JetBlue.
The postponement, until July 8, is a stunning turning point in a battle that analysts say could reshape the aviation sector. The decision is a blow to the leaders of Frontier and Spirit, low-cost carriers that want to combine so they can more effectively compete with the nation’s four dominant airlines.
Frontier’s stock and cash-trading proposal values Spirit at around $2.4 billion, while JetBlue’s all-cash offering totals around $3.6 billion. There are also competing carrots for investors, like the amount rivals will pay shareholders if regulators block the deal – $350 million in the case of Spirit and 400 million dollars in the case of JetBlue.
“This shows that both proposals are attractive,” said Samuel Engel, senior vice president and aviation industry analyst at ICF, a consulting firm. “They want to see what is the maximum dowry they can get.”
Frontier did not immediately respond to Spirit’s request for comment.
JetBlue CEO Robin Hayes celebrated the postponement of the transaction, the second time Spirit pushed a shareholder vote on the transaction. “It is clear that Spirit shareholders have now entrusted the Spirit’s board of directors with an undeniable mandate to reach an agreement with JetBlue,” Mr. Hayes said in a statement.
Frontier argues that despite the lower nominal value of the offer, the share portion allows Spirit investors to benefit more should the combined company’s shares rise. It also hit JetBlue’s bid for being less likely to win regulatory approval. JetBlue considers that both bids are likely to be scrutinized.
However, Frontier’s offer will also be met with a tough look from the Biden administration, which has a skeptical view of large corporate mergers. The number of major airlines has plummeted over the past two decades as airlines consolidate and customers are now upset with airlines as they face mass flight cancellations.
Shares of Spirit rose 2.2%, to $22.90, in after-hours trading on Wednesday but were still well below the $33.50 JetBlue offered.
Spirit and Frontier announced a merger proposal in February. Weeks later, JetBlue object to its proposal. What follows are rounds of a gunman’s rounds and sometimes bitter words. Spirit rejects JetBlue’s offer as a “cynical attempt” to disrupt its merger with Frontier, while JetBlue took aim at Spirit’s board, arguing that its relationship with Frontier precluded objectivity in its assessment of the deal.
Frontier’s CEO, Barry Biffle, was Spirit’s top executive from 2005 to 2013. William A. Franke, Frontier’s president, is also a managing partner of Indigo Partners. The private equity firm used to own both companies. He is expected to head the board if the Frontier-Spirit deal goes through. Frontier, now public, is still owned by Indigo.
Last week, the influential consulting firm on Institutional Shareholder Services recommends that Spirit shareholders vote in favor of Frontier’s bid, a reversal from an earlier proposal based on a revised offer from Frontier. On Tuesday, JetBlue made another sweet offer.
Combined, Frontier and Spirit will become the fifth largest US airline, with an 8.2% market share, behind American, Southwest, Delta and United.
“If our shareholders don’t approve the Frontier deal, we’ll be back to the top,” Spirit chief executive Ted Christie said in an interview with The New York Times this week. . “We have clarified the issues we had with the JetBlue transaction.”
Spirit’s main complaint about the JetBlue bid is that it won’t secure regulatory approval, especially given the antitrust scrutiny JetBlue has. obtained from the Department of Justice regarding its alliance with American Airlines. The agency said in a lawsuit that American, the largest U.S. carrier, would use the partnership to “work with a unique competitor.” JetBlue and American deny that their agreement is anticompetitive and are fighting the case in court.
Frontier and Spirit argue that with cost savings and a larger network, their combined carrier will be able to compete for more customers while still offering very low fares, putting pressure on rivals larger must reduce their ticket price.
One argument against the merger is that continued competition between Frontier and Spirit will force them to keep ticket prices low. With the merger, some of that pressure will be relieved, which could lead them to increase not only fares but also fees – especially on routes serving airports where both operate as Orlando, Fla.
Any acquisition of Spirit will have to go through federal regulators. One reason they might oppose the Spirit and Frontier merger is that forcing the companies to remain rivals would force them to keep ticket prices low.