Shares of Spirit Airlines (SAVE -2.60%) soared more than 13% higher at the open on Monday after the discount airline announced plans to combine with Frontier Group Holdings (ULCC 3.65%). Spirit also released better-than-expected fourth-quarter results, adding to investor enthusiasm.
On Monday, Spirit and Frontier announced plans to combine in a deal valued at about $6.6 billion. Terms of the deal call for Spirit shareholders to receive 1.9126 shares of Frontier and $2.13 in cash for each share they own, giving Spirit an implied value of about $25.83 per share. That's well-above Spirit's $21.73 closing price on Friday.
The deal would combine two leading so-called "ultra-low-cost" carriers, so named for their strategies of selling tickets on the cheap but offering few of the frills of other airlines. While the model is sometimes derided by consumers used to getting free drinks on board and no bag fees, it has proven popular with flyers.
Both airlines were built by Bill Franke, head of private equity firm Indigo Partners. Indigo had a major stake in Spirit before buying into Frontier, and Franke remains chair of Frontier's board. The combination would create the fifth-largest U.S. airline, giving it better scale and geographic reach to compete nationally.
The airlines expect the deal to close in the second half of 2022, and said decisions on issues including branding and who the CEO will be will come in time. Post-deal, Frontier shareholders would own about 51% of the combined company.
In conjunction with the announcement, Spirit also released fourth-quarter results. The airline lost $0.64 per share in the quarter on revenue of $987.56 million, topping analyst expectations for a $0.88 per-share loss on revenue of $963 million.
As a Spirit shareholder, I'm excited about this combination. Airlines were hit hard during the pandemic, but these discount airlines should recover faster, thanks to their ability to undercut rivals on fares and their reliance on leisure travel. Since international and business travel is expected to take longer to return, a lot of the demand in 2022 will be from Spirit's and Frontier's core customers.
The combined airline would have about $2.4 billion in cash, a healthy cushion to survive any new twist to the pandemic.
Mergers come with risk, and Spirit shares are likely to trade along with Frontier in the months to come. Spirit shareholders will get a combination of cash and stock, assuming the deal goes through, so they'll get a guaranteed payout plus some exposure to the potential upside as the deal comes together.