The planned acquisition of Spirit Airlines (SAVE) by JetBlue Airways (JBLU 1.05%) is officially off, and investors are worried about what comes next for Spirit. Shares of the discount airline traded down 14% as of 10 a.m. ET Monday as investors decided they'd rather not go along for the ride.
A deal doomed from the start
JetBlue and Spirit agreed to combine in July 2022 after JetBlue won a bidding war against Frontier Group Holdings. Frontier had argued that a JetBlue/Spirit tie-up would invite intense regulatory scrutiny, but JetBlue was the higher bidder.
The regulatory issues ended up being a dealbreaker. Earlier this year, a federal judge sided with the government on questions about whether a JetBlue/Spirit combination would limit competition. The two airlines were appealing that decision, but with a deadline fast approaching to complete the deal they are instead waving the white flag.
"After discussing our options with our advisors and JetBlue, we concluded that current regulatory obstacles will not permit us to close this transaction in a timely fashion under the merger agreement," Spirit CEO Ted Christie said in a statement. "We are disappointed we cannot move forward with a deal that would save hundreds of millions for consumers and create a real challenger to the dominant 'Big 4' U.S. airlines."
As part of the termination, JetBlue will pay Spirit $69 million. Spirit shareholders also received about $425 million in prepayments from JetBlue as agreed upon in the merger agreement as a way to sweeten the deal.
Is Spirit a buy now that it is going it alone?
Spirit is now left to fly solo into some dangerous headwinds. Although air travel demand has held up relatively well despite rising inflation and growing economic questions, pressure is building. The airline will need to carefully plan capacity from here given questions about demand, and with some of its planes temporarily out of service due to engine issues.
Spirit also has about $1.1 billion in debt due in 2025. The company has hired advisors as part of what it calls taking "prudent steps to ensure the strength of its balance sheet and ongoing operations."
Prior to the initial Frontier courtship, Spirit was one of the rare growth stories in the airline industry. If the economy holds and management is able to navigate through the debt issues, the airline once again could have an attractive story to tell investors. But there is also the real risk of bankruptcy should things turn south in a hurry.
Investors would be prudent to look elsewhere.
