In recent weeks, executives at JetBlue Airways (JBLU -3.77%) have appeared to grow more optimistic about their chances of acquiring Spirit Airlines (SAVE -2.24%). Just last week, JetBlue raised its buyout offer to $33.50 per share after reviewing financial information disclosed by Spirit.
However, in the latest twist to this airline saga, Frontier Group (ULCC -5.43%) -- Spirit's original merger partner -- boosted its offer last Friday. As a result, the Spirit Airlines board has rejected JetBlue's competing proposal again and hopes to win shareholder approval for a merger with Frontier Airlines later this week.
Offers improve slowly but steadily
When JetBlue announced its offer for Spirit Airlines in early May, Frontier Group initially refused to get into a bidding war. Frontier executives argued that JetBlue's proposal was illusory because regulators were very likely to block a JetBlue-Spirit combination.
JetBlue has tried to counter that argument with its own analysis showing that its proposed Spirit takeover would be pro-competitive. Just as importantly, JetBlue offered a sizable reverse termination fee, giving Spirit shareholders some protection in case regulators were to succeed in blocking the transaction.
In early June, Frontier finally agreed to add a $250 million reverse termination fee to its offer, topping JetBlue's terms. JetBlue quickly responded by upping its proposed reverse termination fee from $200 million to $350 million. It also agreed to prepay almost half of that amount so that Spirit Airlines could pay a special dividend of $1.50 per share in the near term (rather than making shareholders wait up to two years for antitrust matters to be resolved).
These improvements to JetBlue's offer made Spirit Airlines reconsider its plans to merge with Frontier Group. That pushed Frontier to raise its bid.
Another win for Frontier
Last Friday, Frontier Group boosted its offer for Spirit Airlines by $2 per share, raising the cash portion of the deal from $2.13 to $4.13. (Most of the purchase price would still be paid in stock.) The ultra-low-cost carrier also matched JetBlue's reverse termination fee of $350 million and agreed to an even bigger prepayment worth $2.22 per Spirit Airlines share, to be paid out as a dividend.
These changes helped Frontier Group win the support of proxy firm ISS. Now, both of the major proxy firms (which advise big investors about how to vote on shareholder matters) support Frontier's bid over JetBlue's counteroffer. Unsurprisingly, Spirit's board also reaffirmed its support for merging with Frontier.
With Spirit Airlines shareholders set to vote on the Frontier offer this Thursday, JetBlue made a final effort to win shareholder support on Monday. First, JetBlue boosted its reverse break-up fee to $400 million. Second, it increased the prepayment from $1.50 to $2.50 per Spirit Airlines share. Third, it agreed to pay Spirit Airlines shareholders $0.10 per share each month that the deal remains in regulatory limbo starting in January 2023, up to $1.80. The first $1.15 would be deducted from the reverse termination fee, but the rest (if any) would be incremental to its prior offer.
These changes are unlikely to sway Spirit's board. JetBlue probably hopes that sweetening its offer will convince shareholders to vote against the Frontier merger, which would then put pressure on Spirit's board to make a deal with JetBlue.
This could be good news for everybody
Frontier's enhanced bid is great news for Spirit Airlines shareholders. The increased cash portion of the offer and the higher reverse termination fee provide more downside protection if the deal falls through or the combined carrier struggles, weighing on Frontier's share price.
By getting Frontier to raise its offer, Spirit Airlines also forced JetBlue to respond, giving shareholders another reasonable option. (That said, I continue to believe that a Frontier-Spirit merger is far more likely to win regulatory approval than a JetBlue-Spirit combination.)
Image source: Spirit Airlines.
Ironically, Frontier's decision to make a better offer for Spirit could be good news for JetBlue shareholders, too. JetBlue may have been biting off more than it could chew by attempting to acquire Spirit. And if it were to sign a deal with Spirit but lose the subsequent antitrust case, it would forfeit $400 million (the reverse termination fee) for nothing.
In short, JetBlue shareholders should probably hope that Spirit decides to merge with Frontier after all. JetBlue has plenty of attractive growth opportunities that it can pursue without the distraction of a costly and time-consuming megamerger.
