Frontier Risks Losing Spirit Deal Forever

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The Frontier Airlines-Spirit Airlines merger saga has gone on for months and JetBlue has injected itself into the mix. But the longer it takes to close the deal, the less likely Frontier will have Spirit at all.


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Spirit Stockholder Meeting Delayed Again

Spirit shareholders’ special meeting was convened and immediately closed again on July 8th, after the prior meeting followed the same protocol on June 30, 2022. The new meeting is scheduled for July 15th where shareholders will vote on a Frontier-Spirit merger. New York-based JetBlue placed competing bids in a tender offer for outstanding Spirit shares at an immediate premium to the Frontier offer, but with its own set of circumstances and risks.

In a back-and-forth that has lasted months, JetBlue Airways has submitted ever-increasing reverse termination fees to assuage fears that the acquisition would not pass regulatory approval. Unlike the Frontier-Spirit merger, JetBlue and Spirit would see all branding, employees, and communications become JetBlue. The Spirit board of directors believes that JetBlue’s deal is less likely to close and therefore inferior due to the Department of Justice suing JetBlue over its Northeast Alliance (NEA) codeshare with American Airlines. While JetBlue has sweetened its offer to an accelerated payout of the breakup fee, and an increased offer for shares, doubt over the deal closing still impairs the carrier from a later merger with Frontier or another carrier.

Frontier Needs To Compete

The Frontier-proposed deal in a vacuum is a compelling move for them both. The combined company would be one of the largest in the United States, the far and away leader in the Ultra Low-Cost Carrier segment, and would have created positive price pressure on the major network carriers.

But this deal is no longer in a vacuum. The reality is that many Spirit shareholders, especially big institutional investors, don’t benefit in the same way that consumers would from a Frontier-Spirit merger. Airline stocks have always been challenged and taking a 50% plus premium on today’s money makes more sense to a lot of shareholders than it would potentially build a carrier that could reach a value even higher than the JetBlue offer.

With each rebuffed offer for Spirit, JetBlue has revised terms and put more money on the table. The breakup fee was a constant ante reaching $350 million and then ultimately $400 million in the last round. Frontier matched those offers and always maintained the superior deal because it was likelier to close and regardless of the breakup fee that Spirit could walk away with. It would still make Spirit less valuable and less likely to find a partner to merge with following a failed acquisition, so the Frontier deal was always better.

Investors, however, appear to disagree. If spirit leadership thought they had the votes for approval of the Frontier merger, the vote would have happened. The continual delays are because the board knows or believes they do not have the votes to approve the merger at which point they will have a fiduciary responsibility to accept the JetBlue offer simply for its breakup fee if nothing else.

Frontier really hasn’t competed with JetBlue in terms of the offer for its Spirit combination. For example, despite matching a prepayment of a breakup fee (JetBlue offered first) and the breakup fee, Frontier removed one of the board seats it had offered to Spirit in the merger. Shareholders have not yet been swayed by Frontier matching whatever JetBlue puts forward, if Frontier wants this merger to happen, they are going to need to compete for this merger as opposed to simply matching whatever JetBlue puts up. They need a far more active approach that causes shareholders to reconsider the value they will get from each offer.

What Happens Next?

Spirit will have to hold this meeting at some point in time, whether they have secured the votes they believe they need or not. The Spirit Board is likely right, the JetBlue deal will not be consummated, and shareholders will get a breakup fee in their pockets but the three carriers will continue to compete.

If Frontier does not put something more compelling in front of these key investor groups, it’s possible that the JetBlue acquisition goes through and Frontier will lose the chance to merge with Spirit forever. The carrier will also find itself even further distant from the largest five carriers in the US and scrambling for growth opportunities or merging with carriers that make less sense for their network and goals.

Frontier has shown little sign that they believe they have a deal in question by merely meeting JetBlue’s offer but that plan hasn’t worked so far. In fact, by the movement of the shareholder meeting to a now fourth voting date is all but confirmed that a vote for a merger would fail. Frontier is running out of time to make a compelling offer, and taking away board seats with a lower immediate cash offer is not moving hearts and minds.

Conclusion

If Frontier doesn’t get serious about putting in an offer that is stand-alone superior to JetBlue’s, they risk losing the chance to merge with Spirit forever. A vote against the merger at this point is a vote for selling out to JetBlue. It might have once been Frontier’s deal to lose, but now it appears that it’s JetBlue’s regardless of whether that is better for the consumer.

What do you think? Is Frontier risking the Spirit merger by not offering a more compelling offer?

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