In a surprise move, JetBlue has confirmed its offer to acquire Spirit for $33 per share in cash, implying a fully diluted equity value of $3.6 billion and an adjusted enterprise value of $7.3 billion. The offer represents a 52% premium to Spirit’s Undisturbed Share Price on February 4, 2022, and a 50% Premium to Spirit’s Closing Price on April 4, 2022. JetBlue intends to fund the transaction with cash on hand and debt financing led by Goldman Sachs.
In February, Frontier Airlines announced a merger with Spirit, where equity holders would receive 1.9126 shares of Frontier plus $2.13 in cash for each existing Spirit share they own which implied a value of $25.83 per Spirit share at Frontier’s closing stock price of $12.39 on February 4, 2022, representing a premium of 19% over the February 4, 2022, closing price of Spirit. The Frontier transaction values Spirit at a fully diluted equity value of $2.9 billion, and a transaction value of $6.6 billion when accounting for the assumption of net debt and operating lease liabilities.
JetBlue stated yesterday that it “firmly believes its proposal constitutes a “superior proposal” under Spirit’s merger agreement with Frontier and represents the most attractive opportunity for Spirit’s shareholders.”
“Customers shouldn’t have to choose between a low fare and a great experience, and JetBlue has shown it’s possible to have both,” said Robin Hayes, JetBlue CEO. “When we grow and introduce our unique value proposition onto new routes, legacy carriers lower their fares and customers win with more choice. The combination of JetBlue and Spirit – coupled with the incredible benefits of our Northeast Alliance with American Airlines – would be a game changer in our ability to deliver superior value on a national scale to customers, crewmembers, communities, and shareholders. The transaction would accelerate our strategic growth and create sustained, long-term value for the stakeholders in both companies.”
The combination of JetBlue and Spirit would create the fifth largest domestic airline, better positioning it on a national level as a low-fare alternative to the dominant “Big Four” airlines.
“While JetBlue and Spirit are different in many ways, we also have much in common, including a focus on keeping our costs low so we can profitably expand and offer an attractive alternative to the dominant ‘Big Four’ airlines. We would conduct a full review of Spirit’s product offering, operational and customer technology, and talent pool to optimize the combined airline,” said Hayes.
JetBlue refers to its long history in Florida, starting with the airline’s first revenue flight in 2000 between New York and Fort Lauderdale. The airline states that Spirit’s existing headquarters in the Fort Lauderdale area and presence at Fort Lauderdale-Hollywood International Airport (FLL), would present JetBlue with the opportunity to deepen that longstanding commitment to Florida. The combined airline would offer more than 170 daily flights at FLL; while at Orlando International Airport (MCO), JetBlue would grow to more than 130 daily flights. JetBlue maintains its training campus and a customer support center in Orlando, and states that it would plan for significant expansion in Florida to support the larger, combined airline.
“Our Northeast Alliance (NEA) with American Airlines has supercharged our growth in New York and Boston, unlocking opportunities for us to grow where we could not have before. We view a combination with Spirit as perfectly complementing the NEA. These strategic moves aim to increase our relevance and bring the JetBlue competitive effect to more places while deepening our roots in the communities we call home. Throughout the pandemic, Florida has been a bright spot for JetBlue, and this would offer us the opportunity to hire even more crewmembers in the state, increase service in FLL and MCO for our customers, and further expand our training and support center footprint,” Hayes said.
JetBlue states that it is “committed to working with labor leaders representing crewmembers and team members at both airlines to ensure the combination supports the needs of those that operate the airline, especially as Spirit team members join JetBlue”. JetBlue added that it “intends to continue having direct crewmembers in places where it has them today and would insource Spirit roles in those cities. In locations where JetBlue does not currently insource, it would plan to conduct a full review to evaluate Spirit’s staffing model and determine the optimal path forward for the combined company”.
The combination would leverage JetBlue and Spirit’s complementary Airbus fleet and order book with a fleet of 455 aircraft with 312 Airbus aircraft on order. With JetBlue’s Embraer E190 fleet set for retirement, JetBlue noted that a “common Airbus fleet and engine commonality would simplify integration, reducing the need for additional training and offering opportunities to better utilize spares, parts, and manufacturer support across both airlines”.
No JetBlue shareholder vote is required to complete the proposed transaction, which will not be subject to financing contingency. JetBlue has approximately $2.8 billion of cash on hand as of December 31, 2021, and has a variety of unencumbered assets available to finance, worth in aggregate approximately $9 billion. As already noted, JetBlue intends to fund the transaction with cash on hand and debt financing led by Goldman Sachs
JetBlue anticipates that the proposed transaction is expected to deliver $600-700 million in net annual synergies once integration is complete, driven in large part by expanded customer offerings resulting from the greater scale of the network. The combined airline is projected to have annual revenues of approximately $11.9 billion based on 2019 revenues. JetBlue expects the transaction to be accretive to earnings per share in the first full year, excluding integration costs.
JetBlue states that it is “highly confident that its proposed transaction would be completed on a timely basis and on a timeframe generally consistent with the pending transaction with Frontier. JetBlue’s proposal contemplates that the definitive agreement for the proposed transaction would contain contractual commitments designed to address any regulatory concern, including, while JetBlue is highly confident in the completion of the transaction, a “reverse break-up fee” that would become payable to Spirit in the unlikely event the proposed transaction is not consummated for antitrust reasons. These terms represent a meaningful improvement compared to the terms contemplated in the pending transaction with Frontier”.
The execution of a definitive merger agreement between JetBlue and Spirit would be subject to approval by each company’s Board of Directors and completion of the transaction would be subject to customary closing conditions, including receipt of required regulatory approvals and approval of Spirit’s shareholders.
Analysts are sitting on fence here regarding the benefits of both airline combinations. JPMorgan’s
Jamie Baker commented that the merits of a potential JetBlue-Spirit merger were “not as abundantly clear to us as are those that could stem from other combinations among remaining, non-Big 3 airlines”, and before the planned pre-market conference call tomorrow, the team are remaining on the sidelines until the management can make its case.
Airline consolidation is favoured by analysts and other market participants as airlines seek to achieve greater strength to gain market share and improve slot access, cut operational costs, repair revenue and balance sheets coming out of the pandemic crisis.