With the Frontier deal dead, Spirit plans to sell it to JetBlue

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Spirit Airlines and Frontier Airlines agreed on Wednesday to drop their merger proposal, paving the way for JetBlue Airways to acquire Spirit after a months-long bidding war for the low-cost carrier.

Spirit and Frontier’s decision to end their agreement was announced as Spirit shareholders were still voting on the proposal. It was apparent that despite the support of Spirit’s board of directors, shareholders were prepared to reject the deal and seek a richer one from JetBlue.

Spirit CEO Ted Christie said he was disappointed to abandon the merger with Frontier.

“Spirit’s Board of Directors will continue its ongoing discussions with JetBlue as we pursue the best path forward for Spirit and our shareholders,” he said in a statement.

JetBlue released a statement saying it was pleased the Frontier deal was terminated and was talking to Spirit about negotiating a deal as soon as possible.

Frontier reported two weeks ago that it would not raise his bid, which was worth more than $2.6 billion in stock and cash, less than JetBlue’s cash offer of $3.7 billion. On Wednesday, CEO Barry Biffle said he was disappointed with the outcome but that Frontier’s board had taken “a disciplined approach” to merger negotiations.

“Rather than overpaying Spirit, the board has put the interests of Frontier, our employees and our shareholders first,” Biffle said on a call to discuss second-quarter results.

Attention will now focus on whether Spirit and JetBlue can agree on terms and secure shareholder approval, as well as regulatory hurdles to a deal.

Spirit’s board backed the Frontier deal for months in the face of a more expensive offer from JetBlue, arguing that antitrust regulators would never let JetBlue buy the country’s biggest budget airline and withdraw as a competitor from more expensive carriers. Unsurprisingly, JetBlue disagreed with this view.

The Biden administration was always likely to scrutinize either deal. Both the president and his top antitrust official at the Justice Department have indicated an aversion to corporate mergers.

Some analysts said the small size of Frontier and Spirit would have earned them a pass from antitrust regulators in previous administrations, but not anymore. Still, a JetBlue deal looks more problematic, in part because the Justice Department is already suing to sever a regional partnership in the northeast between JetBlue and American Airlines.

Airline mergers can be messy. Combining different workgroups, fleets, and technology systems can lead to misfires.

JetBlue would likely raise the wages and benefits of Spirit employees to JetBlue’s level. It would be expensive to repaint and reconfigure Spirit’s yellow planes to look like JetBlue on the outside and more spacious conditions on the inside.

“There is a significant cost difference between JetBlue and Spirit which will be further complicated by JetBlue’s recent moves towards first-class and international services,” said Christopher Raite, analyst at market research firm Third Bridge. He said merging the two airlines would be another complication in addition to “significant regulatory scrutiny”.

border and spirit announced their agreement on February 7, saying that they would create a huge discount airline it would save consumers $1 billion a year in airfares by creating a powerful new competitor for American, United, Delta and Southwest.

The proposal would have brought together two very similar airlines – both tempt travelers with very low fares, but add fees for some things the bigger carriers include with most tickets, soft drinks instead for a bag in the luggage compartment.

JetBlue is a more conventional airline that some travelers prefer due to its amenities, including free TV and internet access during flights. In that sense, Spirit seems an odd fit.

Once Spirit was in play for a merger, however, JetBlue CEO Robin Hayes decided he couldn’t sit back and watch two budget carriers combine and outgrow his size. On April 5, JetBlue started a bidding war announcing his own Spirit cover project.

JetBlue saw the acquisition of Spirit as the best way to quickly add planes and pilots and break out of the second tier of US airlines.

JetBlue argued it would also help consumers, lowering fares more effectively than Frontier and Spirit.

New York-based JetBlue launched a furious campaign to convince Spirit shareholders to reject Frontier’s offer, and the tide seemed to turn in its favor. Spirit’s board has postponed votes on the Frontier deal four times, and this month Frontier CEO Barry Biffle admitted his side is lose badly.

Both Frontier and JetBlue have increased their offers in recent weeks, including and increasing break fees for Spirit shareholders.

In the end, Frontier offered $4.13 in cash plus 1.9126 shares of its stock for each Spirit share. It was worth about $2.65 billion at Frontier’s closing price on Tuesday, and Spirit shareholders would have owned 48.5% of the combined company.

JetBlue’s offer was simpler – $33.50 per share, plus a late fee to cover any delays in regulatory review, which would bring the offer’s value to $3.7 billion, all cash.

JetBlue investors seem unimpressed with the airline’s pursuit of Spirit. From the time JetBlue entered the tender through Tuesday, its shares have fallen 45%, more than any other U.S. airline except regional carrier Mesa.

With Spirit’s fate settled, analysts say more mergers are possible between the smaller airlines – but likely not deals involving American, United, Delta or Southwest, due to antitrust concerns.

JetBlue and Alaska Airlines waged a bidding war against Virgin America in 2016, which Seattle-based Alaska won. Alaska’s strength on the west coast and JetBlue’s network on the east coast and the Caribbean have long been the subject of merger speculation.

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