August 11, 2022
$SAVE- $24.68 per Share
The Spirit Airlines($SAVE) acquisition by Jetblue presents one of the best risk-reward arbitrage plays in the current market. The deal is expected to close by early to mid-2024 at the latest and is structured in a manner that provides incredible upside at minimal risk at Spirit’s current share price.
As of August 11, 2022, $SAVE is currently trading at $24.68 per share. On July 28, JetBlue agreed to acquire Spirit at a premium price of $3.8 Billion or $33.50 per share. Jetblue outbid Frontier Airlines’ initial merger agreement with Spirit, which was 1.912 shares of Frontiers Airlines (ULCC) and $4.13 per share.
JetBlue’s $33.50 per share provides a current upside of 35.70% from Spirit’s current share price. In addition, however, the deal is structured in an extremely shareholder-friendly manner that provides additional upside and extremely limited downside.
This deal can only proceed upon shareholder approval, which is expected to be received sometime early this fall. Upon shareholder approval, JetBlue will pay a prepayment of $2.50 per share to shareholders. Regardless of whether the deal is ultimately approved by regulators, shareholders will receive $2.50 for each share of SAVE they own once they have approved the deal.
Additionally, JetBlue has provided an incentive to SAVE shareholders for the deal to close as soon as possible. For every month after January 2023 that the deal has not closed, JetBlue will pay an additional $0.10 per share every month to shareholders until the merger is completed or terminated. If the business combination(merger) is completed by December 2023, SAVE will be purchased for $33.50 per share. If, however, the merger has still not been completed, JetBlue will increase the price they pay per share in increments, up to $34.15 in July 2024.
Closing the deal as soon as possible is in the best interest of JetBlue, as per the merger agreement, they will be required to pay millions more every month that the business combination has not been completed.
If regulators do not permit the acquisition of Spirit Airlines by Jetblue, and the deal is nixed, JetBlue will pay Spirit Airlines $70 million, and $400 million to Spirit Airlines shareholders. This $400 million breaks down to approximately $3.60 per share in the event of the Spirit Airlines acquisition falling apart.
At its current share price of $24.68, Spirit Airlines has a 45-55% upside, and a limited maximum downside of 13.9% assuming worst case scenario, which is disregarding another merger with Frontier Airlines for $4.13 cash and 1.9 shares of Frontier Airlines stock, thanks to the shareholder-friendly deal that JetBlue has offered Spirit Airlines. The worst-case scenario in this merger play- regulators blocking JetBlue’s acquisition of Spirit- could still be profitable based on the current price of SAVE, as Spirit Airlines might even proceed with their previous merger with ULCC.
Assuming the worst-case scenario, which would be regulators completely blocking the acquisition due to antitrust concerns after shareholders had already approved the deal, shareholders would still receive $2.50 per share for approving the deal and $3.60 per share as a result of the deal falling through. Spirit Airlines would additionally receive a cash infusion of $70 million. Assuming a cost basis of $24.60 per share of SAVE, the combined $6.10 per share from JetBlue would lower the cost basis of each SAVE share to $18.50 per share when disregarding taxes. In mid-May of 2022, amidst the harsh board market selloff and after a poor Q1 earnings report, SAVE saw a 52-week low of $15.92 per share. A drop from $18.50 per share to $15.92 per share would imply a downside of 13.9%. Spirit Airlines could then proceed with its original merger with Frontier Airlines, which had originally offered $4.13 per share and 1.912 shares of Frontier Airlines (ULCC) for each share of SAVE. The downside of the JetBlue merger is incredibly limited due to the alternate ULCC merger possibility, shareholder prepayment, and deal breakdown fee.
Assuming business combination by year-end, SAVE shareholders will receive $2.5 per share for deal approval and $33.50 per share upon business combination. Total cash per share from JetBlue upon deal close is $36.00, a 45.87% upside from the current share price.
Assuming business combination in December 2023, SAVE shareholders will receive $2.5 per share for deal approval, $1.10 per share for the deal’s delay after January 2023, and $33.50 per share, the agreed price for each share upon the business combination. Total cash per share from JetBlue upon deal close is $37.10, a 50.32% upside from the current share price.
Assuming business combination in July 2024, SAVE shareholders will receive $2.5 per share for approval, $1.80 per share for the deal’s delay after January 2023, and $34.15 per share, the agreed price for each share upon the business combination in July 2024. Total cash per share from JetBlue upon deal close is $38.45, a 55.80% upside from the current share price.
The current spread between the agreed-upon acquisition price and the current share price signifies a total lack of faith by the market that the deal will go through. In this case, there is a significant regulatory hurdle for JetBlue and Spirit to cross before regulators will approve the merger.
Spirit Airlines and JetBlue in total will have less than 10% market share of the domestic market. At such a low market share, from a complete outsider's perspective antitrust concerns appear to be almost baseless. Unfortunately, however, there is a possibility that regulators attempt to block the deal on the premise that JetBlue’s acquisition of Spirit will remove a significant ultra-low-cost carrier, increasing the price of airfares for lower-income fliers. This possibility is very real, which is why JetBlue and Spirit must demonstrate that their business combination is not anti-competitive. They must argue that by becoming the 5th largest airline, they can better compete with the four largest air carriers, which have more than 80% of the current domestic market share.
If regulators continue to have concerns, I have no doubt JetBlue will provide whatever concessions and assurances the Department of Justice needs for the business combination to occur. JetBlue's executives have already admitted that they will likely have to divest some of Spirit's holdings and rights as concessions when negotiating with the DOJ. JetBlue’s vigorous and almost incessant outbidding of Frontier Airlines for Spirit Airlines, large business termination agreement of $400 million, and increasing premiums they must pay to Spirit Airlines shareholders the longer the deal lags on demonstrates their confidence and commitment for this merger to proceed. JetBlue’s management knows they direly need Spirit to help them expand and compete with other large airline carriers, which is why they have given Spirit shareholders a deal they cannot refuse. JetBlue will try to get this deal done no matter what.
When regulators' positions on this merger become clearer, the spread between acquisition price and current share price will decline.
Based on past precedent, the deal will likely go through. In 2016, Alaska Airlines acquired Virgin America for $2.6 billion to become the largest airline on the West Coast. In 2013, American Airlines merged with US Airways, which created the $10 billion dollar airline that exists today. Similar-sized and larger mergers and acquisitions have occurred in the past and based on the precedent those deals set, the approval of JetBlue’s acquisition of Spirit is likelier than a rejection.
Bloomberg on Antitrust Hurdles for JetBlue