Late in the day on Tuesday, Spirit Airlines (SAVE 1.72%) shares jumped more than 20% after word leaked that JetBlue Airways (JBLU) had submitted a bid to buy the discount airline. Overnight, analysts voiced some skepticism about the bid, causing shares of Spirit to fall as much as 6% on Wednesday morning.
After a tough 18 months riding out the pandemic, animal spirits are alive and well in the airline industry. In February, discounter Frontier Group Holdings (ULCC 3.80%) announced plans to acquire Spirit for about $2.9 billion in cash and stock. But there are just not many potential targets out there for follow-on deals, which might be why JetBlue on Tuesday instead went public with a plan to break up that Frontier/Spirit deal with its own offer.
JetBlue has bid $3.6 billion in cash for Spirit, a premium to the Frontier offer and a valuation more than 50% above Spirit's stock price prior to the original February deal announcement.
Given the higher bid, it is no surprise Spirit's initial move was to the upside. But there are reasons for concern that the JetBlue offer won't get done. Frontier and Spirit pitched their merger as relatively complementary, bringing together Frontier's Denver hub with Spirit's East Coast-focused operations to create a national competitor, in hopes of winning over regulators. JetBlue, with a strong East Coast presence, would likely have a much more difficult time winning over skeptical antitrust authorities.
Spirit shares recovered much of what they initially lost on Wednesday morning, but as of midday the stock is still trading nearly 20% below the JetBlue offer price. That's a massive spread that provides a lot of opportunity for investors if the deal ends up getting done, but also reflects the market's fears that JetBlue doesn't have the winning hand.
For now, the ball is in Spirit's court. On Tuesday night the airline said its board would consult with advisors and evaluate JetBlue's proposal. It is possible the board will decide to open up negotiations with JetBlue in an attempt to get one or more of its suitors to sweeten their bid, though both have already offered a substantial premium for the target.
For investors, the best thing to do is sit tight and see how it all might play out. Speculators looking for a short-term gain might be tempted to buy Spirit in hopes the JetBlue deal gets done, but be forewarned that there is always the possibility that no deal will get done and that Spirit shares will eventually retreat to where they were before Frontier put the airline in play.