JetBlue (JBLU) Makes $3.6 Billion Bid for Spirit (SAVE)

JetBlue Airways Corporation (JBLU) has made an all-cash offer of $3.6 billion to acquire ultra-low-cost airline Spirit Airlines, Inc. (SAVE). Announced on April 5, 2022, JetBlue's bid comes on the heels of a planned merger between Spirit and another discount carrier, Frontier Group Holdings, Inc. (ULCC), that was announced in February.

In a press release, JetBlue indicated that its goal in acquiring Spirit is to position itself as "the most compelling national low-fare challenger to the four large dominant U.S. carriers." The initial reaction of airline analysts was skepticism about the purported benefits of the combination. Meanwhile, the status of the earlier planned merger between Spirit and Frontier is now in doubt.

The Offer

JetBlue is bidding $33 per Spirit share. This represents a premium of 52% to Spirit's undisturbed share price on Feb. 4, 2022, and a premium of 50% to Spirit's closing share price on April 4, 2022. An undisturbed share price means the share price undisturbed by any indication of potential takeover-related activity.

Prior to the announcement, shares of Spirit had been trading around $22. On the morning of April 6, 2022, they were around $26. Shares of JetBlue, meanwhile, have sunk from a pre-announcement level of about $15 to around $12.50 on the morning of April 6, 2022.

JetBlue believes that its offer constitutes a "superior proposal" versus Spirit's merger agreement with Frontier and thus represents the most attractive opportunity for Spirit's shareholders. Specifically, JetBlue indicates that, as of April 4, 2022, its offer for Spirit represents a 37% premium to the value implied by the planned Frontier transaction.

The Rationale

JetBlue CEO Robin Hayes stated, in part: "Customers shouldn't have to choose between a low fare and a great experience, and JetBlue has shown it's possible to have both ... The combination of JetBlue and Spirit—coupled with the incredible benefits of our Northeast Alliance with American Airlines [Group, Inc. (AAL)]—would be a game changer in our ability to deliver superior value on a national scale."

JetBlue believes that acquiring Spirit would position it as "the most compelling national low-fare challenger to the four large dominant U.S. carriers." JetBlue claims that it sparks significantly greater fare decreases from legacy carriers when it enters a new market than when ultra-low-cost airlines enter a market. The reason, JetBlue asserts, is its "unique combination of low fares and award-winning customer service."

JetBlue states that the four largest U.S. carriers control more than 80% of the domestic market. It says that, combined with Spirit, it would become the fifth-largest domestic airline, "better positioning it on a national level as a customer-centric, low-fare alternative."

Analysts Are Skeptical

UBS called the deal a "headscratcher." Bank of America noted that both JetBlue and Spirit use Airbus planes, but they "struggle to find additional benefits for JBLU."

Raymond James downgraded JetBlue to market perform and said that product and labor would be tough to combine. Analyst Savanthi Syth wrote: "The process is also likely to distract or possibly unwind current initiatives, most notably the Northeast alliance with American. Moreover, the prospect of elevated debt, even if manageable, is likely to be an overhang on investor sentiment."

The Biden administration has been casting its own skeptical eye on mergers and alliances in light of its initiatives to promote competition. Last year, the administration sued to block JetBlue's Northeast Alliance with American, by which they coordinate routes serving the New York City and Boston areas.