ULCC offered to buy out SAVE in a mostly stock transaction
JBLU offers to buy SAVE for 33 / share, SAVE says no
JBLU goes hostile for 30 / share incl a 200MM breakup fee
ULCC offers a 250MM breakup fee (up from no breakup fee)
JBLU offers a 350MM breakup fee, part of which will be paid out as a dividend immediately upon the deal’s approval
What’s really interesting about this is the bidding war is about how much SAVE gets paid if the regulators shoot down the deal, and less about the actual buyout price. JBLU’s market cap is also only 3.3 billion, so if the deal falls through, they’re basically willing to blow more than 10% of their market cap in cash plus tens of millions in additional costs attempting the merger.
Frontier Group Holdings agreed to buy Spirit Airlines Inc. for $2.9 billion in cash and stock. The two carriers said the deal “would create the fifth-largest U.S. airline and allow them to compete more aggressively against larger rivals.” The companies valued the deal at $6.6 billion, including the assumption of net debt and operating leases. If the deal had closed, Frontier would have owned about 51.5% of the combined company. The airlines said the deal would allow them to "bring additional low-cost service to underserved routes in the U.S., Latin America and the Caribbean and to hire an additional 10,000 workers by 2026. " If the deal went through, there would’ve been an opportunity for arbitrage of about 20% premium with SAVE’s share price of about $22 before the deal was announced due to the following terms: “Spirit shareholders will receive 1.9126 shares of Frontier in addition to $2.13 in cash for each share of Spirit they own.” Of course the share price jumped when the deal was announced, but slowly bled out due to concerns of regulation/confidence in whether or not the deal would actually go through.
JetBlue Airways Corp. enters the scene, saying they are willing to buy SAVE for an all cash offer of $3.6 Billion, with the unsolicited bid implying roughly $33 a share (remember, the share price at the time of the offer was still below $30). JetBlue appealed to the share holders, saying in a statement that the deal was “the better opportunity for Spirit investors, and its offer represented a 37% premium to the value implied by the Frontier proposal.” Just FYI, JetBlue is still tied up with another antitrust suit from the DoJ about their American Airlines partnership:
Of course, SAVE shareholders were excited about the deal, being that there was more arbitrage and there was more room to grow if the company was acquired with JetBlue:
JetBlue was optimistic in its growth, saying. “in three years’ time, it could achieve net synergies of as much as $700 million a year.” However, shareholders weren’t convinced due to JetBlue’s expenses relative to Sprit Airlines:
Anyways, SAVE sits down and starts talks with JetBlue, saying that their offer “could reasonably be likely to lead to a superior proposal”, which under the merger agreement from Frontier, the “superior proposal” could be entertained without breaking the rules of the contract. Spirit made it pretty clear that it wasn’t dismissing the Frontier offer entirely, saying “The merger agreement with Frontier remains in place, and Spirit’s board continues to recommend it”. Of course, Frontier had also said previously that the deal between JetBlue and Spirit Airlines would " lead to higher prices for travelers" and also was skeptical on whether or not antitrust regulators would even approve the deal.
In order to put SAVE and their shareholder’s minds at ease, JetBlue pledged that it would “shed assets to win regulatory approval and to pay a $200 million breakup fee” to facilitate acceptance of the deal.
Spirit rejects JetBlue’s more lucrative deal, saying “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” due to the risk that regulators would bar the merger.
“We struggle to understand how JetBlue can believe DOJ, 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 [ultralow-cost] carrier.”
JetBlue didn’t give up there, launching a hostile takeover attempt through a tender offer, now offering only $30 per share to SAVE’s shareholders instead of the initial $33 per share, but JetBlue said that they “would be open to paying its initial offer price of $33 a share if Spirit comes to the negotiating table and provides data that JetBlue has requested”
“If the Spirit shareholders vote against the transaction with Frontier and compel the Spirit Board to negotiate with us in good faith, we will work towards a consensual transaction at $33 per share, subject to receiving the information to support it.
"The Spirit Board failed to provide us the necessary diligence information they had provided Frontier and then summarily rejected our proposal, which addressed their regulatory concerns, without asking us even a single question about it”
The tender offer was to remain open until June 30th. Spirit urged its shareholders to not take any action and that it would come out with its official position in a few days’ time.
A couple days later, Spirit Airlines’ Board comes out and urges its shareholders to reject the tender offer, saying the offer “carried too much regulatory risk” and continued to back the Frontier merger. Just for a summary thus far, JetBlue has offered $30 a share for Spirit through its tender offer and said it could raise the bid to $33 if Spirit came back to the negotiation table and give JetBlue the information it requested and had already offered a $200 million breakup fee and promised to divest assets in order to help aid in any concerns of regulation barring the merger. Frontier’s offer, however had at the time a roughly $20 value of with its cash-and-stock proposal based on its stock price at the time (around May 19th).
Frontier Airlines declares that it is willing to pay a $250 million breakup fee if regulators were to block the merger. A Spirit Airlines chairman said “The combination of a higher reverse-termination fee and a much greater likelihood to close in a Frontier merger provides substantially more regulatory protection for Spirit stockholders than the transaction proposed by JetBlue”, supporting the Frontier deal.
A couple days after Frontier proposes its breakup fee, JetBlue announces that it is willing to increase its breakup fee from $200 million to $350 million, or roughly $3.20 per SAVE Share, on its Tender Offer. JetBlue also added that it was also willing to “prepay $164 million of the breakup fee, or $1.50 a share, as a cash dividend to Spirit investors upon shareholder approval of JetBlue’s offer” boosting total consideration of the deal to $31.50 a share, or about $3.4 billion.
Spirit shareholders are going to vote on which merger to accept on Friday, June 10th.
Any thoughts on how to play this merger vote? A put play on JBLU if it falls through perhaps considering the claims? I played JBLU on the news of possible Spirit deal a few months back but havent been keeping up with it.
Spreads are kinda sucky on the options so it was tough to play (and I only put on a small position as a result), but I did
Long 5 SAVE 22.5C
Short 15 SAVE 30C
I’m playing this for the outcome where shareholders vote down frontier’s deal, and spirit agrees to the merger with jblu in exchange for them upping the offer to the original $33 / share. That deal should take some time to complete, so if it looks good from a regulatory perspective by december, the shares should be trading around $31-32, which works well for the strikes I chose.
Note that if you do an options trade on this you should be willing to hold to expiry. Options liquidity/spreads suck ass.
Regardless of what the offer is, it seems like the market is pricing in the fact that this deal will never get approved.
SAVE is up a lot today, but I think it’s just because the entire market (especially beaten down stocks) is up a lot. I don’t think the additional $2 / share really moves the needle here in terms of the deal actually happening.
So there could be an announcement tomorrow between JBLU and SAVE since Frontier dropped out. I posted a potential callout for this because I originally said that I’d look at taking puts on JBLU (which I still might do) but the better play is SAVE. If you calculate the current share price $24.80 and the JBLU offer of 33.50, you have a percentage increase of around 35.1% in SAVE if it got near the 33.50 price. This play would strictly be a announcement play and it could already be priced in but I’m looking at 8/19 $25 Calls. I’m going farther out just in case it isn’t announced tomorrow and this all hinges on the announcement happening later in the day. Here is the optionstrat breakdown of what I’m looking at: Long Call Calculator | OptionStrat - Options Trade Visualizer
JetBlue said it will pay $33.50 a share in cash for Spirit, including a $2.50 a share prepayment if Spirit shareholders approve the deal and a 10 cent per month ticking fee starting next year until the deal closes.
The airlines said in a filing that they expect the deal to close no later than the first half of 2024.
SAVE at around $25 now. Wonder why the steep discount of 34%. Is it that likely that the deal will not go through because of regulatory challenges stemming from anti-trust concerns?
Yup seems like it’s pricing in deal failure risk (incl. antitrust approvals)
** Excerpt from a WSJ article
The Justice Department is suing JetBlue and American Airlines, seeking to unwind a partnership between those two airlines. A trial is scheduled to begin this fall.
JetBlue has agreed to pay Spirit’s shareholders a breakup fee of $400 million if the deal is barred by antitrust authorities, as well as another $70 million to the company. It has also committed to divesting certain assets, including all of Spirit’s holdings at airports where JetBlue and American are working together.
Spirit and Frontier had previously argued that regulators would almost certainly prevent a merger between Spirit and JetBlue and that the review process could hobble Spirit for up to two years.
JetBlue has countered that any deal, including a combination between Spirit and Frontier, would face similar levels of pushback from regulators.
“Our view is that the best way that you can bring more competition to the sector is to create an exciting, new, low-fare, high-quality national airline that can compete with the big four,” JetBlue Chief Executive Robin Hayes said in an interview Thursday. “So we will be making those arguments.”
Spirit had delayed a shareholder vote on the Frontier combination multiple times in hopes of gaining more support, but the deal wasn’t expected to gain approval when Frontier and Spirit announced that they had decided to terminate it.
JetBlue has said that buying Spirit would accelerate its growth by years and that it is confident it can navigate the regulatory process, even if it is lengthy.
“We hope taking the U.S. Department of Justice’s misplaced concerns about our partnership with a legacy carrier off the table will help us when we go to trial this fall to obtain approval from the court to move forward with our Spirit acquisition,” JetBlue Chief Executive Officer Robin Hayes said in an internal memo seen by Bloomberg.
Let’s see if typing something here will move this to the catalysts section of discord? I think I’m going to play this for mid/late January based on court timelines. This is a very risky play as it is based on a judge’s approval for the merger. Those that bought stock when SAVE was at $9 are going to benefit the most.
I would keep your caps around 26/27 ish range if you think the judge will approve - Good chance “IF” the Judge approves it is with conditions and also in the LOI - has a declining price vertical based on time to execute. In the event you think it is denied - $10-$6 range I suspect.