Spirit takes a pass on JetBlue’s buyout offer

Spirit Airlines sees a merger with JetBlue as unattainable. Not for lack of interest, mind you. JetBlue’s cash offer of $3.6 billion still stands. But doubts around the likelihood of regulatory approval have Spirit’s Board of Directors recommending that it continue to move forward with the previously planned Frontier merger instead. Assuming even that can get past regulators.

After a thorough review and extensive dialogue with JetBlue, the Board determined that the JetBlue proposal involves an unacceptable level of closing risk that would be assumed by Spirit stockholders. We believe that our pending merger with Frontier will start an exciting new chapter for Spirit and will deliver many benefits to Spirit shareholders, Team Members and Guests.

– Mac Gardner, Chairman of Board of Directors for Spirit Airlines

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Ultimately, Spirit believes a JetBlue merger is a step too far for US regulators and holds almost no chance of consummation. In its message rejecting the offer, Spirit notes:

We believe a combination of JetBlue and Spirit has a low probability of receiving antitrust clearance so long as JetBlue’s Northeast Alliance (NEA) with American Airlines remains in existence…

We further believe that your divestiture proposal is unlikely to resolve DOJ’s concerns about a combination of Spirit and JetBlue if the NEA continues in existence.  DOJ clearly views the NEA as having a broader national effect and Spirit believes DOJ will not place great weight on your proposed remedy, especially because there are reasons to doubt the efficacy of similar divestitures as a remedy in past airline mergers.

Beyond the NEA concerns, Spirit acknowledges that JetBlue’s buyout plan would “remove about half of the ULCC capacity in the United States.” Moreover, “the conversion of Spirit aircraft to JetBlue configuration will result in significantly diminished capacity on former Spirit routes, also resulting in higher prices for consumers.“

Spirit directly calls out the NEA and the potential termination fee in its reply to JetBlue management. But Spirit wanted JetBlue to commit to “abandoning the NEA at closing” and notes that “even a high reverse termination fee will not fully compensate Spirit stockholders for the likely significant business erosion Spirit will face during what will be a protracted approval process.”

But the Northeast Alliance is not up for debate, according to JetBlue. That the partnership with American Airlines remains subject to a government lawsuit notwithstanding, JetBlue will not cede the NEA for the merger and does not believe that should be a factor in the negotiations. Spirit strongly disagrees.

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Hayes’s reply describes Spirit’s demands in incredibly unfavorable terms, “including a ‘hell or high water’ antitrust commitment, which is unprecedented in airline transactions, and a reverse break-up fee that exceeds almost all precedent transactions, are off-market and contrast starkly to the limited regulatory commitments made by Frontier, a transaction with a similar regulatory profile.”

Still, JetBlue now offers a cash guarantee on the deal. If it cannot satisfy regulators and the deal falls through, JetBlue would pay Spirit $200 million for its troubles. Spirit remains unmoved.

Moreover, while insisting that its overlap on routes and markets is lower than Frontier’s, JetBlue allowed that it would cede slots in the Boston (~12 daily departures) and New York City Area (EWR-21, LGA-13), hoping to allay concerns about the Northeast Alliance and the concentration of power in those markets. JetBlue also suggested it could reduce the combined presence at Fort Lauderdale, where the two airlines currently control more than half the total capacity in the market.

With management unwilling to negotiate, JetBlue CEO Robin Hayes suggested the company might stage a proxy fight instead, taking its offer directly to shareholders:

Given the opportunity to benefit from the significant cash premium and immediate liquidity, we are confident that the Spirit stockholders will embrace our Proposal, as evidenced by the Spirit stock price reaction upon the disclosure of our Proposal on April 5. While we would unquestionably prefer to negotiate a transaction with you, if you continue to refuse to constructively engage with us so that we can deliver this value to your stockholders, we are actively considering all other options available to us.