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Jun 22, 2022
[4 min Read]
Spirit Airlines ($SAVE) is the subject of a bidding war between JetBlue ($JBLU) and Frontier ($ULCC) that will soon come to fruition. I'll explain here why it seems fairly certain that shareholders will vote for the higher bid—JetBlue. With the shareholder vote scheduled for June 30, the circumstances present the opportunity for a near-term options play.
The Competing Offers
On February 7, Frontier and Spirit announced their intention to merge. Under the terms of the proposed merger, Spirit shareholders would receive 1.9126 shares of Frontier (the combined airline) plus $2.13 in cash for each of their Spirit shares. Existing Frontier shareholders will own 51.5% of the combined airline. At the time of the announcement, it implied a value of $25.83 per Spirit share. Spirit's Board unanimously approved the merger and entered into a merger agreement, basically making the Frontier deal binding unless Spirit found a better offer.
JetBlue pounced on the opportunity, offering $33 per share. Spirit's board unanimously rejected the bid, despite the significant premium over the Frontier's offer. The board cited “substantial completion risks”—in other words, concern that the deal would fall apart if challenged by antitrust regulators. Spirit's chair said that “we believe JetBlue's economic offer is illusory, and Spirit's board has not found it necessary to consider it."
It's worth noting here that the boards of Spirit and Frontier are deeply intertwined. Spirit's CEO (Ted Christie) was a former executive at Frontier, and Frontier's chairman (Bill Franke) is the former chairman at Spirit. Franke has been trying to get this deal done for years.
After Spirit's board rejected the JetBlue bid, JetBlue made a tender offer directly to the shareholders. The tender offer initially provided for $30 per share. JetBlue downplayed the antitrust risk, and to allay any such concerns, they added a $200 million breakup fee in the event regulators block the deal. The breakup fee was later sweetened to $350 million, with JetBlue pledging to prepay $164 million of the breakup fee ($1.50 per share) as a cash dividend to Spirit shareholders. This effectively boosted consideration to $31.50 per share. JetBlue also committed to take certain divestment measures in New York and Boston to avoid increased antitrust scrutiny. Frontier responded with adding their own breakup fee of $200 million.
The Beauty Contest
To sum it up, as it sits now, the two offers are as follows:
Frontier: Each Spirit shareholder will receive $2.13 and 1.916 shares of the combined airline per each share of Spirit stock. $200 million breakup fee.
JetBlue: each Spirit shareholder will receive $31.50 per share, $1.50 of which is paid in the form of a prepayment dividend upon shareholder approval. Breakup fee of $350 million (inclusive of the prepayment).
In my view, it seems likely that JetBlue will win. Yes, there may be slight antitrust concerns, but the regulatory concerns cannot outweigh the significantly higher value to shareholders and the $1.50 prepayment dividend. And yes, Spirit's board opposes the JetBlue takeover, but at the ownership level, Spirit is mostly owned by institutions and mutual funds. It appears highly unlikely that these investors would vote against the JetBlue deal just for the sake of corporate cronyism between the Spirit and Frontier boards.
The Options Play
Spirit is currently trading around $22 per share. JetBlue's $31.50 offer therefore presents a $9.50 upside, or 43%.
Of course, even if shareholders vote in favor of the JetBlue deal, it won't be final yet. Apart from the $1.50 prepayment, there's always a chance that the deal can fall apart before it's closed—either through an antitrust lawsuit or otherwise. Still, even assuming for the sake of argument there's only a 50% chance of approval, this puts the expected value of the merger at $4.75 over the current market price. (That is, a 50% chance of receiving the full $9.50 value.) So, even after taking into account the uncertainty in regulatory approval, the expected per share value should be at least $26.75—a 22% increase over current market price.
Again, the vote is scheduled for June 30, so I'm looking at July 8 options. (I'm going to pass over the July 1 options in case there's confusion or debate over the outcome of the vote.) I'm also going at-the-money. There's obviously no point in going too far OTM on this one.
Another approach would be to buy ULCC or JBLU options/shares, but it's the acquisition target (SAVE) that stands to see the most movement.
SAVE 7/8 $21.50c
SAVE 7/8 $22c
Tl;dr: Bank on SAVE shareholders approving the JetBlue tender offer for $31.50.