Analysis: Spirit Airlines’ winning bidder could need years to recoup its prize


JetBlue, Spirit and Frontier Airlines logos are seen in this illustration taken June 27, 2022. REUTERS/Dado Ruvic/Illustration/

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July 12 (Reuters) – The bidding war for Spirit Airlines Inc (SAVE.N) between Frontier Group Holdings Inc (ULCC.O) and JetBlue Airways Corp (JBLU.O) could leave the buyer taking years to recover its investment.

JetBlue’s latest cash and stock offering values ​​Spirit at $3.7 billion, while Frontier’s latest cash and stock offering, which Spirit recommends its shareholders support, is worth $2.4 billion. Spirit postponed its shareholders’ vote on the deal for the third time to July 15 to continue negotiations with the two suitors.

JetBlue and Frontier could have to wait three to five years or more to recoup their investment if they are successful, according to a dozen investment bankers and analysts polled by Reuters.

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Frontier expects the combined company to generate approximately $500 million in annual synergies, most of which will begin to kick in about three to four years after the deal closes. JetBlue says a combination with Spirit will generate synergies of $600-700 million in the first year after the integration is complete.

Airline experts said the long-term synergies cited by JetBlue and Frontier are worth the price the companies are willing to pay for Spirit, although some analysts have warned the bidding war could weigh on their finances in the near term. .

“We’re probably heading into a recession. Now is not a good time to borrow a lot of money to buy a competitor,” said Israel Shaked, professor emeritus of finance at Boston University.

Spirit, JetBlue and Frontier declined to comment.

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The bidding war started in February this year, when Frontier offered to buy Spirit. Two months later, JetBlue launched an unsolicited all-cash offer worth $3.6 billion for Spirit, higher than the price offered by Frontier.

Since then, the two sides have engaged in a game of one-upmanship and made competing offers for Spirit that included sweeteners such as higher breakage fees and route divestments, which were intended to assuage regulatory concerns.

Frontier, which has so far been unable to garner enough shareholder support for its proposal, earlier on Monday urged Spirit to extend the shareholder voting deadline to July 27, saying its last offer was its “best and last offer” and that it waived its right to match JetBlue’s most recent offer.

The airline industry is grappling with high fuel prices, pilot shortages and flight cancellations as it tackles a rebound in travel demand more than two years into the pandemic of COVID-19. A rapprochement with Spirit would give the winning contender more scale and resources to deal with these challenges.

Raymond James & Associates airlines analyst Savanthi Syth said the deal made sense in the long term, even if it was expensive.

“This is a more expensive deal, at 17 times the price-to-earnings ratio, than the deal for Virgin America at 15.5 times,” Syth said, referring to the 2016 bidding war between Alaska Air Group Inc (ALK.N) and JetBlue. it ended with Alaska’s purchase of Virgin America in a $2.6 billion deal.

Alaska has succeeded in its agreement. Since taking over Virgin America, it has gained market share from low-cost rivals and paid off debt it incurred to fund the acquisition, analysts said.

JetBlue makes the same bet. It will take on $3.5 billion in new debt to fund its bid for Spirit. Analysts and management experts have pointed out that in the event of a global recession, a heavily leveraged balance sheet could weigh heavily on JetBlue’s financial performance, diminishing its earning power.

“Recessions are always very tricky environments for airlines,” said Florian Ederer, associate professor of economics at the Yale School of Management. “We’ve been through a whole series of bankruptcies in previous airline recessions.”

Frontier will not stretch as much. It had $727 million in cash and about $207 million in long-term debt as of March 31.

It’s possible the bidding war will reach price levels that would cause a suitor to walk away, said Helane Becker, managing director and principal research analyst at Cowen.

“At some point, either (Frontier or JetBlue) will drop out because Spirit might become overvalued. We don’t think it’s there yet, but we’ll have to see what happens,” Becker said. .

Frontier has an advantage in that its offer is seen by Spirit as more likely to be approved by antitrust regulators than a combination with JetBlue. JetBlue’s current Northeast alliance with American Airlines is already in the crosshairs of regulators — in June, a U.S. judge ruled that the Justice Department’s antitrust lawsuit against American Airlines Group Inc (AAL.O) and JetBlue would go forward.

Spirit has, so far, said a deal is not possible unless JetBlue abandons the partnership.

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Reporting by Anirban Sen, Angelique Chen and David Carnevali in New York Additional reporting by David Shepardson in Washington Editing by Greg Roumeliotis and Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.


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