(Bloomberg Opinion) -- An airline bidding war appears to be over before it even really started.
Spirit Airlines Inc. said on Monday that it was sticking with the initial deal it agreed to with ultra-low-cost carrier Frontier Group Holdings Inc. in February and turning down a higher bid from JetBlue Airways Corp. Even after JetBlue offered to make certain divestitures and pay a $200 million fee if antitrust authorities rejected the transaction, Spirit said a tie-up with the carrier “involves an unacceptable level of closing risk” because of expected regulatory challenges. Spirit took particular issue with a marketing alliance between JetBlue and American Airlines Group Inc. that started in 2021 — an arrangement that the Department of Justice is suing to block on antitrust grounds.
“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 ultra-low-cost carrier, Mac Gardner, Spirit's chairman, and Edward Christie, Spirit's chief executive officer, wrote in a joint letter to JetBlue. The acquirer's unwillingness to prioritize the Spirit deal over the American Airlines alliance “imposes on our stockholders a degree of risk that no responsible board would accept,” the target company said. A plan to rejigger the layout of Spirit's aircraft to give customers more leg room and improve the target airline's service offerings to be more in line with JetBlue's would result in higher prices for consumers, fewer seats and questionable competitive benefits, Spirit said.
These are all legitimate arguments — many of which I made myself when JetBlue thrust itself into the middle of Spirit's deal with Frontier. What's curious about this situation is that Spirit didn't use the wide gap between JetBlue's bid and Frontier's as leverage to extract a higher price. JetBlue was offering $33 a share in cash, or about $7.3 billion including the assumption of debt and operating leases. Frontier's cash-and-stock bid was worth about $22 a share as of Friday, but the value was dropping on Monday along with its stock as investors concluded it might have to actually put up the funds to complete the Spirit deal now that JetBlue is seemingly out of the picture. The stock component of Frontier's offer is valuable to Spirit holders because it gives them an opportunity to benefit from cost savings and revenue benefits of the combined airline as well as the broader post-pandemic recovery. But that's still a large divide in price — particularly because it's not clear that the Frontier merger is a slam-dunk from an antitrust perspective, either.
Even if Spirit felt as if the JetBlue offer was riskier from an antitrust perspective, the dollars behind it were real enough. This feels like a missed opportunity. It's no wonder that Spirit shares were down about 9% as of midday in New York on Monday. The rebuff of JetBlue without getting anything in return from Frontier is something that the board will have to better explain. These are the kinds of situations that tend to attract the attention of activist investors.
The most comparable recent situation is Kansas City Southern's decision last year to accept a takeover proposal from Canadian Pacific Railway Ltd. over a higher-priced offer from rival railroad Canadian National Railway Co. But there are some significant differences in the two bidding wars. Kansas City Southern actually did deem Canadian National's offer superior and switch its allegiance to that bidder. It only agreed to accept the lower bid from Canadian Pacific after the U.S. Surface Transportation Board issued a strongly worded opinion denying Canadian National's request to form a voting trust — an in-between structure that allows an acquirer to close a deal financially ahead of official regulatory approval. The board had already signed off on a similar arrangement proposed by Canadian Pacific, making the choice a no-brainer for Kansas City Southern.
Spirit is doing a lot more reading between the lines here. The Justice Department is indeed suing to block JetBlue's alliance with American Airlines, and one might reasonably conclude it would frown upon the merger with Spirit, too. Perhaps there's been some behind-the-scenes communication to that effect, although it's theoretically possible regulators might reject the former and accept the latter. A Frontier-Spirit deal, meanwhile, is also likely to draw significant scrutiny from regulators and has already attracted some skeptical comments from prominent members of Congress, including Senator Elizabeth Warren. It was telling that the shares of the largest U.S. airlines rallied when the Frontier-Spirit merger was announced as investors concluded the consolidation would help add some pricing discipline to a highly competitive market for U.S. leisure travel. Any shrinking of the number of U.S. airlines is going to get a tough look after the industry received tens of billions of dollars in pandemic aid.
Spirit would have been wiser to keep more options on the table.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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