Spirit Airlines wants its shareholders to reject a hostile offer from JetBlue, in favor of its deal with Frontier. But that doesn’t mean Spirit investors can’t still squeeze a bit more out of Frontier. They might want to hang tight, writes JMAGuilford:
, in favor of its current agreement to merge with cheap-tier peer Frontier. They might want to hang tight, though. True, JetBlue’s $3.3 billion offer, which at $30 a share looks about 40% higher than Frontier’s, comes with antitrust riskthat makes it probably less valuable than it looks. But that doesn’t mean Spirit investors can’t still squeeze a bit more out of Frontier.
The big question for a Spirit shareholder is how much Frontier could pay, in theory. Start with what the two airlines together might be worth. Based on their undisturbed market values, and adjusting for a 13% decline in an index of U.S. airline stocks since the merger was agreed in February, their combined worth is $4.4 billion. Add the benefits of a potential merger, which Frontier reckons come to $500 million of extra EBITDA a year, or about $1.
The second question is how much of that Spirit can persuade Frontier – and its majority owner and Chairman William Franke – to give away. Right now, the offer on the table is about $230 million in cash, and just under 49% of the new, bigger airline’s stock. That would leave Frontier itself with a stake worth about $2.9 billion – over $500 million more than the value of what its shareholders started with. In other words, Frontier can in theory pay all that away before it starts destroying value.
- Spirit previously agreed to be acquired by ultra-budget peer Frontier on February 7, in a cash-and-stock deal valued at $18.81 per share based on Frontier’s closing price on May 13. Spirit has rejected JetBlue’s previous overtures, saying that a tie-up would be unable to obtain antitrust approval.Editing by John Foley and Sharon LamOpinions expressed are those of the author.