LONDON – JetBlue continues its pressure on the Spirit-Frontier merger as it encourages Spirit shareholders to vote no on the merger.
The American carrier is continuing its push to get Spirit shareholders to accept their deal instead of Frontier’s, which is currently at $30 per share but is wanting to push this up to $33 as a form of good faith.
Hayes: JetBlue Offers More Value…
JetBlue’s CEO Robin Hayes commented on this announcement today, encouraging the Spirit board to not follow through with the merger:
“JetBlue offers more value – a significant premium in cash – more certainty, and more benefits for all stakeholders. Frontier offers less value, more risk, no divestiture commitments, and no reverse break-up fee, despite more overlap on non-stop routes and their own regulatory challenges.”
“Yet the Spirit Board failed to provide us the necessary diligence information it had provided Frontier and then summarily rejected our proposal, which addressed its regulatory concerns, without asking us even a single question about it. The Spirit Board based its rejection on unsupportable claims that are easily refuted.”
“Ask yourself a simple question: why won’t the Spirit Board engage with us constructively? The interests of Bill Franke’s Indigo Partners and the long-standing relationships between the two companies is the obvious answer.”
The Full Letter…
Below, you can see the full copy of the letter sent to Spirit shareholders by JetBlue:
Dear Spirit Shareholder,
You have an important choice to make about your investment in Spirit Airlines.
We believe the Spirit Board of Directors (the “Spirit Board”) has failed to act in your best interests by refusing to engage constructively on our clearly superior proposal to acquire Spirit.
JetBlue offers more value – a significant premium in cash – more certainty, and more benefits for all stakeholders. Frontier offers less value, more risk, no divestiture commitments, and no reverse break-up fee, despite more overlap on non-stop routes and their own regulatory challenges.
Yet the Spirit Board failed to provide us the necessary diligence information it had provided Frontier and then summarily rejected our proposal, which addressed its regulatory concerns, without asking us even a single question about it. The Spirit Board based its rejection on unsupportable claims that are easily refuted.
Ask yourself a simple question: why won’t the Spirit Board engage with us constructively? The interests of Bill Franke’s Indigo Partners and the long-standing relationships between the two companies is the obvious answer.
Given the Spirit Board’s unjustified refusal to engage, we have decided to bring our proposal directly to the Spirit shareholders,and we urge you to vote “AGAINST” the Frontier transaction at Spirit’s upcoming special meeting. This will send a message to the Spirit Board that you want it to negotiate with us in good faith. We also launched an all-cash, fully financed tender offer to purchase all the outstanding shares of common stock at $30.00 per share and we encourage you to underscore your message to Spirit’s Board by tendering your shares into our offer. If the Spirit shareholders vote against the transaction with Frontier and compel the Spirit Board to negotiate with us in good faith, we will work towards a consensual transaction at $33 per share, subject to receiving the information to support it.
Our current proposal offers:
- More value and more certainty for Spirit shareholders with our ALL-CASH offer. JetBlue offers you $30 per share in cash, representing a 60% premium to the value of the Frontier transaction as of May 13, 20221, a 77% premium to Spirit’s latest closing price2, and a 38% premium to Spirit’s unaffected share price3 – a very compelling value, and, no matter how you measure it, a higher premium than in our original proposal.
- Even more value potential after diligence and good faith negotiation. Based on the clear superiority of our offer, we expected the Spirit Board to engage constructively. Given its unwillingness to share necessary information or negotiate in good faith, we adjusted our price accordingly, but will work towards a consensual transaction at $33 per share, subject to receiving the information to support it.
- More regulatory certainty through our divestiture commitment and $200 million reverse break-up fee.
In contrast, the proposed Frontier transaction offers Spirit shareholders LESS:
- Less value. Our current proposal represents a compelling 60% premium to the value of the Frontier transaction as of May 13, 2022.
- Less value certainty. Frontier’s stock price has declined 30% since the announcement of the Frontier transaction4,resulting in approx. $770 million decrease in the value of the Frontier transaction to you. Plus, the future value of the Frontier / Spirit combined company’s stock is uncertain, especially in a continually challenging operational and market environment. Spirit’s and Frontier’s projections underpinning their transaction are based on flawed assumptions, including with respect to personnel attrition and wage inflation.
- Less regulatory commitments and less closing certainty. Despite having a similar regulatory profile to JetBlue, Frontier offers no divestiture commitment or reverse break-up fee.
JetBlue Offers More Value and Certainty to Spirit Shareholders – in Any Scenario…
Our current proposal provides superior value to the Frontier offer, regardless of whether either transaction is completed.
- When we complete our proposed transaction, Spirit shareholders would receive at least $30.00 per share in cash, compared to $18.815 per share from the Frontier transaction.
- In the unlikely event our proposed transaction is not consummated, Spirit shareholders will receive a reverse break-up fee of approximately $1.83 per share, compared to no break-up fee in the Frontier transaction. We estimate that translates into total economic value of approximately $17 per share from JetBlue against approximately $15 in the Frontier transaction6.
… And Better Trading Value in the Short Term.
In addition, we expect the outcome of the Spirit special meeting to influence how the Spirit shares will trade in the short term. Based on the trading patterns since the Frontier transaction was announced, we expect that, if the transaction is approved, Spirit’s shares will trade at approximately $177. On the other hand, basedon what we observed since our proposal became public, if the Frontier transaction is rejected, we expect Spirit shares to trade between approximately $23.1 and $25.58, at least a 36% premium to Spirit’s latest closing share price9.
|Transaction Does Not|
|Short Term Trading Depending|
on Meeting Outcome
(including RBF of
A vote AGAINST the Frontier transaction is a vote for a higher Spirit share price, regardless of any consideration concerning the actual consummation of either transaction. A vote for the Frontier transaction is a vote for a lower Spirit share price.
JetBlue Is Confident We Will Obtain Regulatory Approval.
A combined JetBlue-Spirit will create a more compelling and viable competitor to the Big Four airlines that control more than 80% of the U.S. market. JetBlue’s entry into new routes triggers fare decreases from legacy airlines that are more significant than those resulting from ultra-low-cost carriers; this phenomenon has been described as the “JetBlue Effect”.
Our recent economic analysis, using Department of Transportation Data, shows JetBlue’s presence on a nonstop route decreases legacy fares by ~16%, about three times as much as the presence of an ultra-low-cost carrier. This phenomenon is well established and foundational to JetBlue’s business model.
We are not the only ones who cite the JetBlue Effect. Coined by an MIT study in 2013, the JetBlue Effect has been acknowledged by the Department of Justice (DOJ) as recently as 2021 when it said, “JetBlue’s reputation for lowering fares is so well known in the airline industry that it has earned a name: the ‘JetBlue Effect.’ JetBlue’s record in Boston and New York illustrates why.”
We are confident we can address any regulatory concerns the Spirit Board, regulators or courts may have through:
- JetBlue’s expedited expansion and the resulting net fare decreases;
- demonstrated ease of other ultra-low-cost carriers’ continued expansion; and
- the divestitures we are prepared to undertake.
Don’t Be Misled: Spirit’s Transaction with Frontier Has Similar Regulatory Risk.
- Both transactions would create the #5 player with very similar market share. A combined JetBlue and Spirit would have an 8% market share based on full year 2021 seats compared to 7% for a combined Frontier and Spirit.
- Frontier overlaps with Spirit on significantly more nonstop routes (104) than JetBlue (54)10, and JetBlue has less overlap in flights, seats, and ASMs than Frontier in the metropolitan areas served by both11.
Spirit’s Suggestion that Our Northeast Alliance Is a Regulatory Obstacle Has No Basis in Fact or in Law.
JetBlue’s Northeast Alliance is already demonstrating its positive benefits for customers in the Northeast. Regardless of what one thinks of the Northeast Alliance, it is irrelevant to our ability to complete the acquisition of Spirit.
- The Northeast Alliance is a limited, procompetitive alliance with American Airlines focused on unlocking growth for JetBlue in one of the nation’s most constrained geographies, the Northeast US. The alliance creates a compelling third competitor in a market previously dominated by two players and has already started delivering benefits to consumers.
- Divestitures: We will proactively offer the DOJ a remedy package that contemplates the divestiture of all Spirit assets located in the area covered by the Northeast Alliance (New York and Boston) so, as a result of our proposed transaction, we will not increase our presence in these airports.
- The Northeast Alliance litigation will go to trial this September, and we believe the outcome of that trial will not impact the outcome of the regulatory process for the acquisition of Spirit, which will likely take place later. If the court allows the DOJ to block the Northeast Alliance, by definition it will not be an obstacle to the acquisition of Spirit. If we are successful in defending the case, as we think we will be, it will be a testament that the alliance is procompetitive, disproving Spirit’s claim. In either case, the Northeast Alliance litigation does not impact JetBlue’s ability to acquire Spirit.
Given the clear superiority of our offer, including the regulatory commitments we have made to back up our high confidence in our ability to complete our transaction, why hasn’t the Spirit Board engaged?
Clearly because Spirit’s Board is prioritizing its own self-interest and personal relationships with Frontier over its shareholders’ interests.
There is good reason to believe the Spirit Board is not acting in the best interests of its own shareholders.
- Multiple Spirit directors involved in the decision to merge with Frontier have significant ties to Bill Franke, who appointed each to the Spirit Board when he was chairman of Spirit, and while Indigo Partners (the current controlling shareholder of Frontier) was a large shareholder of Spirit.
- This includes McIntyre Gardner, current chairman of Spirit, who replaced Mr. Franke, current chairman of Frontier, both of whom led the negotiations between the two companies.
- 5 of the 8 Spirit directors will continue as Board members of the Frontier / Spirit combined company if the Frontier transaction is consummated.
After eight months of discussions, Spirit agreed to an inferior transaction with Frontier without considering what other alternatives were available to Spirit’s shareholders. Further, the outsized concessions to Frontier by the Spirit Board do not reflect a meaningful effort to maximize shareholder value.
- The final terms of the Frontier transaction reflected only an 18.9% premium to the Spirit share price at the time of the announcement12, compared to an average premium in precedent airline transactions of 86%13.
- The final value of the Frontier transaction reflected only an approximate 6% increase from the terms initially offered by Frontier14.
- The original value of the Frontier transaction of $25.83 per share was significantly below the standalone value resulting from the discounted cash flow analysis of Spirit’s financial advisors15.
- Frontier is not providing any divestiture commitment or a reverse break-up fee. The absence of both means that despite obvious hurdles for its own transaction, Frontier, at its own option, could simply decline to make any regulatory concessions and abandon the Frontier transaction at no cost (or compensation to Spirit or its shareholders).
Since our original proposal was made, the Spirit Board consistently refused to engage constructively with us.
- On April 7, the Spirit Board determined that our original proposal could reasonably be expected to lead to a “Superior Proposal”; and yet, it refused to provide the limited diligence information we requested which it had already provided to Frontier.
- On April 25, the Spirit Board requested we agree to unprecedented contractual terms as a precursor to sharing the diligence information we had originally requested.
- These demands were off-market and contrasted starkly to the limited regulatory commitments made by Frontier, a transaction with a similar regulatory profile.
- On April 29, we presented an enhanced proposal, which was responsive to the concerns of the Spirit Board on closing certainty and included regulatory commitments representing a significant improvement from those offered by Frontier.
- Two days later, the Spirit Board rejected our enhanced proposal, without ever contacting us to discuss it, and, according to its own proxy, without considering the clearly superior economics.
By refusing to engage on our original proposal, the Spirit Board has deprived its shareholders of the most attractive value creating opportunity available to them.
WE URGE YOU TO SEND A MESSAGE TO THE SPIRIT BOARD BY VOTING “AGAINST” ALL PROPOSALS RELATED TO THE FRONTIER TRANSACTION AT THE SPIRIT SPECIAL MEETING ON JUNE 10, 2022 AND TENDERING YOUR SHARES INTO OUR OFFER.
In addition to voting “AGAINST” the Frontier transaction at the Spirit Special Meeting, we urge all Spirit shareholders voting against the Frontier transaction to exercise their appraisal rights under Section 262 of the Delaware General Corporation Law, which entitles Spirit shareholders who perfect these rights to the fair value of their shares, as determined by a Delaware court. Spirit, by admission of its own financial advisors, is worth more than the value of the Frontier transaction and this and the superior value of our current proposal, as well as our original proposal, would be factors used by the court in determining fair value of your shares. If the Spirit Board continues to refuse to negotiate with us and the Frontier transaction is approved, appraisal is the only way to capture the value included in our proposals. Please consult your legal advisor before exercising appraisal rights.
Additional details about JetBlue’s superior offer can be found at JetBlueOffersMore.com.
Protect Your Own Best Interests
Our proposal represents a compelling opportunity to receive a significant premium in cash, with greater value and certainty than the Frontier transaction. Spirit’s Board has prevented you from receiving it.
We are fully committed to pursuing our original $33 per share proposal. We urge you to protect your own best interests. Let the Spirit Board know you want the opportunity to receive our superior offer by voting AGAINST the Frontier transaction and tendering your shares in our cash tender offer.
Chief Executive Officer
It remains clear that JetBlue is going to put all the stops it has in its back pocket in order to make a deal with Spirit Airlines.
This has been a very contentious topic over the last few weeks, but as it stands, it does appear that the Spirit-Frontier merger will go ahead.
Then again, aviation is a funny thing, and this could all change in a heartbeat, so for now, all we can do is sit back and watch to see how the next steps will unfold.