What happened
JetBlue Airways (JBLU -2.96%) has sweetened its offer for Spirit Airlines (SAVE -3.40%), and Spirit shares are gaining altitude as a result. Shares of Spirit traded up about 5% on Monday morning as we head into a key week in determining what the future holds for this discount airline.
So what
A fierce takeover battle in the airline industry is nearing its conclusion, and JetBlue is trying to make sure it puts the best offer possible in front of Spirit shareholders. On Friday, Spirit holders are set to vote on a proposed combination with Frontier Group Holdings (ULCC -4.48%), and JetBlue is hoping to convince Spirit investors to reject that offer in favor of pursuing a deal with JetBlue.
Image source: Spirit Airlines.
On Monday, JetBlue raised the size of the breakup fee it would pay Spirit if regulators blocked a JetBlue-Spirit deal to $350 million, from $200 million. It also pledged to pay $1.50 per share of that breakup fee directly to Spirit shareholders as a cash dividend if Spirit and JetBlue come together and Spirit holders approve a transaction with JetBlue.
JetBlue's all-cash $30-per-share offer for Spirit is higher than Frontier's cash and stock offer, which at current Frontier prices is worth about $21.18 per share. But Spirit's board has repeatedly determined that Frontier's bid is superior, despite its lower price, because it sees heightened antitrust risk in the JetBlue offer. In a statement announcing his company's revised offer, JetBlue CEO Robin Hayes said that the sweetener more than mitigates any added risk.
"The key features of our improved proposal -- the up-front cash payment and increased reverse break-up fee -- reflect the seriousness of our commitment and underscore our confidence in completing this transaction," Hayes said. "Additionally, given the similar regulatory risks of the two transactions and the increased reverse break-up fee we are prepared to provide, we believe our improved proposal remains a superior proposal by any measure."
Now what
We know how Spirit's board views the risks involved in the two transactions. On Friday, we will find out what Spirit shareholders think. The outcome is far from certain.
While it is true there is more regulatory risk in the JetBlue bid, the Frontier merger is no slam dunk to win approval. Given the gap in the two offer prices, and JetBlue's willingness to assume increased regulatory risk in the form of a higher breakup fee, Spirit shareholders might be tempted to roll the dice and see if JetBlue can get its deal done. It is also possible that Frontier comes in with a sweetened bid prior to the vote.
Regardless, the bidding war has highlighted the issues airlines see in growing organically in the years to come. The industry currently has a shortage of pilots and a long waiting list to buy new planes. There are risks to dealmaking, and the winning bidder faces an arduous task up ahead once the deal is complete. But given the limited options for growth, JetBlue is doing its best to get Spirit to come to the table.
