Spirit Airlines (SAVE 2.40%) is sticking with a merger agreement with Frontier Group Holdings (ULCC 6.18%), even though JetBlue Airways (JBLU 15.22%) is offering a higher price. Investors appear to be disappointed, sending shares of Spirit down more than 8% on Monday morning.
The airline industry's ongoing merger saga took a fresh twist on Monday morning. While the outcome is still not totally clear, it appears there are limits to the amount rivals are willing to spend for Spirit Airlines. Spirit had originally agreed to be acquired by Frontier for about $24 per share in cash and stock, but earlier this month, Jet blue stepped in with an all-cash $33 per-share offer.
Spirit's board has spent the last few weeks evaluating the JetBlue offer. While the total consideration is clearly higher, Spirit said in a statement that the board had concluded the JetBlue proposal was not superior because it doesn't believe the acquisition will win regulatory approval.
Specifically, Spirit is concerned that JetBlue's existing alliance with American Airlines Group makes it difficult for JetBlue to argue it will be a robust competitor.
"We struggle to understand how JetBlue can believe [the Department of Justice], or a court, will be persuaded that JetBlue should be allowed to form an anticompetitive alliance that aligns its interests with a legacy carrier and then undertake an acquisition that will eliminate the largest [ultra-low-cost] carrier," Spirit board chairman Mac Gardner and CEO Ted Christie wrote in a letter to JetBlue CEO Robin Hayes.
JetBlue responded by noting that it is willing to divest assets to win regulatory approval and offered to pay Spirit a $200 million breakup fee if a deal between the two is rejected by regulators.
Spirit shares are likely moving as much on what wasn't said as what was said. JetBlue made some promises about what it was willing to do to win regulatory approval but didn't sweeten its offer. And based on Spirit's feelings about the antitrust risk, Frontier likely feels no pressure to bump up its offer to try to match JetBlue's. At this moment, it appears there won't be a prolonged bidding war for Spirit Airlines.
For Spirit investors, there might be limits to the near-term upside from here. But there's still compelling reason to hold the shares. The Frontier deal is far more likely to win regulatory approval, which would mean Spirit shareholders will receive both a cash payout and a continued investment in what's set up to be a large and growing discount operation.