Spirit CEO: JetBlue's Tender Offer 'Defies Common Sense'
Monday Spirit Airlines hosted a webcast discussing their board's decision to unanimously reject JetBlue's unsolicited tender offer and reiterate their support for the merger agreement with Frontier airlines. On the call were CEO Ted Christie, Ms. DeAnn Gable, Senior Director of Investor Relations, and Andrew Finch, the Co-Chair of the Anti-Trust Practice Group in the Litigation Department at Paul Weiss.
Ted Christie began the webcast strongly rejecting the JetBlue proposal “JetBlue's offer is not reasonably capable of being consummated JetBlue's regulatory case is weak and defies common sense. By their own admission. They [JetBlue] expect the DOJ to sue, to block the JetBlue acquisition. So I have to wonder if JetBlue is purposely downplaying the substantial regulatory risk. It's inconceivable to us that acquisition of Spirit by JetBlue gets approved unless they abandoned the NEA. The anti-competitive Alliance with American airlines JetBlue has demonstrated that preserving this Alliance with American and not its acquisition of Spirit is its first prize. When we were engaged in discussions with JetBlue, we asked if they would abandon the NEA in order to get regulatory approval for a proposed transaction with Spirit. They refused. If they think approval is so likely why refuse to do whatever it takes to get the deal done.”
Christie continued, “But at the simplest level, a JetBlue transaction is about a high-fare carrier trying to buy a low-fare carrier, reducing capacity, and raising fares. Common sense tells you that is not a favorable story for regulators. In my opinion, JetBlue knows it faces a low probability of approval, which is why it's shifting the risk on Spirit’s stockholders with inadequate compensation.”
Mr. Christie didn’t mince words when questioning JetBlue’s motivation for the proposal: “I believe it's a cynical attempt to disrupt our merger with Frontier because a Spirit-Frontier combination poses a competitive threat. Why else would JetBlue wait over seven weeks after we announced the Frontier deal to submit the acquisition proposal. And why did JetBlue wait to launch the tender offer until just after we mailed our proxy statement for the Frontier merger?
I don't think that timing is coincident. Think about a world post Spirit-Frontier combination for JetBlue, they will have to compete with a ULCC carrier of larger size, scale, and reach. And against one of the lowest cost structures in the world. And the ULCC fares are a fraction of JetBlue’s, that is a daunting environment.”
Ted pointed directly at the risks identified in JetBlue’s 10K, specifically identifying the Spirit-Frontier merger proposal as a risk to their competitiveness, adding “I think they’re scared of the competition. As a result, I think JetBlue believes it's worth the $200 million reverse termination fee to disrupt our pending merger with Frontier.”
Ted’s message to shareholders is to “not be distracted” by JetBlue’s tender offer. Interestingly the Spirit Airlines CEO pointed to the “Supposed premium” that is below the historical high-trading price, being based on “highly depressed pandemic related all-time-low stock price levels” reminding the listeners that the Spirt stock was trading above $30 for the entire five years leading up the pandemic.
Optimistically, the Spirit CEO claimed “Once the airline industry recovers to pre-pandemic levels, that alone is expected to deliver Spirit shareholders' value well above JetBlue's offer” while pointing to synergies and the 48.5% ongoing ownership stake.
Pointing to communications from JetBlue and labeling them as misinformation Ted Christie mentioned the “thanks” received from JetBlue for their openness and transparency in negotiations. He stated, “JetBlue is so desperate to disrupt our combination with Frontier, that they are willing to spread inaccurate statements and mischaracterizations to the public.” After bringing focus to the investment in time and money into the “validity and merits” of JetBlue’s analysis.
Andrew Finch, who previously served as the Principal Deputy Assistant Attorney General, and Acting Assistant Attorney General at the DOJ antitrust division has been serving as one of Spirit’s advisors in evaluating the anti-trust risk of a JetBlue-Spirit combination began his assessment after Ted Christie. Mr. Finch spoke on the regulatory hurdles from his point of view serving in the DOJ Antitrust Division stating: “I can tell you that the facts do not support a favorable decision by regulators in a JetBlue-Spirit combination. The conversation would be centered around one raising ticket prices on Spirit routes to JetBlue. And reducing capacity on aircraft by reconfiguring them to the JetBlue format with fewer seats to removing approximately 50% of the ULCC capacity in the US as a result of eliminating Spirit as the largest ULCC airline, then merging Spirit with what's essentially a combined JetBlue and American Airlines in the Northeast.”
Andrew then spoke to the difficulties JetBlue is experiencing with litigation surrounding the NEA agreement with American. He continued “If JetBlue wins or settles the NEA litigation, the DOJ will be even more determined to stop an acquisition of Spirit. As JetBlue will have just completed a defacto merger in the Northeast with America Airlines, which is the largest airline in the world. On the other hand, if JetBlue loses the NEA litigation JetBlue would likely appeal in a last-ditch effort to save the anti-competitive alliance that it has implied is more important to it than an acquisition of Spirit, and that could take well over a year to resolve. And even if we set aside the issue of the NEA, one thing that Spirit and JetBlue can agree on is that the DOJ would likely bring a lawsuit to block a JetBlue-Spirit transaction.”
For those arguing the “quick money” is in the JetBlue offer Andrew made clear that the transaction if it somehow made it through all of the roadblocks and litigation, would likely take up to two years to be resolved. A point Ted reiterated later in the call when answering questions from the audience.
The Spirit CEO closed out their remarks with “Our board continues to unanimously recommend that Spirit’s stockholders vote for the merger proposal with Frontier on June 10th. Further, we recommend Spirit’s stockholders reject the JetBlue tender offer and do not tender any shares of Spirit.”
At this point, the call switched to a Q&A format. The first listener asked if Spirit had considered the costs to retrofit their entire fleet to match the layouts JetBlue has. Ted mentioned he was unaware of what JetBlue’s costs would be but said they would not be insignificant adding; “what's critical is that the reconfiguration results in the removal of seats from our airplanes, which we estimate could be as much as 20%, which is just a significant reduction.” The reduction of seating capacity is something that would drive customer costs upward.
The caller followed up asking if there was ever a discussion about maintaining two separate brands? Ted answered “JetBlue was clear that they intended to do exactly what they've described, which is to migrate our product to the JetBlue product. Which we viewed as extremely problematic from a regulatory narrative perspective. You're taking seats out and raising fares. That's not a pro-consumer pro-competitive argument.”
The next participant asked, “Have you talked to Frontier about adjusting either the cash portion or the equity portion since the stocks are down so much since the February 7th date?” Ted stated “the truth is we negotiated hard with Frontier on the deal that we landed on. At the time of our negotiation, they actually had a superior market cap, and yet we landed in a position to be able to deliver greater than 51% of the economics to our shareholders. And in doing so preserving all the upside in a stock-for-stock deal we thought that was critical during this timeframe when we're in an ultra depressed market. Which has proven to be very smart from our perspective.”
The caller noted the support from the AFA, the flight attendant union at both companies, and asked if they had received similar support from other labor groups. Ted acknowledged the support from AFA and stated “there's nothing specific to comment on right now, other than the fact that, it is also true that our pilots are both represented by the same union.”
A representative from Raymond James asked what would happen if the Spirit shareholders voted no on June 10th. Ted’s simple response was “Well, we'd obviously don't think that that's likely.” Continuing he described the process of reverting to independent operations. Ted quickly pivoted back to the discussions over the years leading to the merger with Frontier being the best answer for their shareholders.
Another participant followed up the line of questioning wondering how Spirit was able to say the no vote would be unlikely, specifically asking “is that just based on kind of how you feel about the strength of your proposal, or is that just based on conversations that you've had with Spirit shareholders over the last week or so?” Ted responded, “I'd hesitate to put any speculation as to how individual shareholders will intend to vote.” Speaking of the strength of the Frontier proposal Ted stated, “we arrived at something that we think is superior and delivers significant value. So I think those are the reasons Mike, that we feel very positive about the story in front of our shareholders.” Ted further restated that Spirit shareholders will participate in the upside coming out of the recovery and the synergies forecasted if Frontier and Spirit combine.
The Caller then followed up with a question for Andrew pointing to possible regulatory risks that exist with the Spirit-Frontier merger. Andrew spoke to the disruptive nature of a national ULCC airline created through combining “largely complementary” routes. He sees the combined carrier as a “robust alternative” to the larger legacy airlines. The Spirit expectation is this will increase rivalry and enhance the competitive process. The combined carrier will allow more flights to more destinations at ULCC rates allowing more people to fly who otherwise wouldn’t be able to afford trips. Finch further stated “it's going to be a market structure that's better for society.” and, “I think that while they'll look at it carefully, I think that they'll come to the conclusion. I hope that this is going to be a transaction that will enable enhanced competition and enable the combined firm to actually push back against the legacies and their fortress hubs by penetrating at a greater scale and have an improved ability to withstand their aggressive responses from those incumbent carriers.”
On the topic of route overlap, the Spirit hosts spoke about JetBlue’s rhetoric on the subject, stating route overlaps aren’t relevant in discussion related to the Spirit-Frontier merger proposal. Specifically, they pointed to the substantial competition from legacy airlines and others on the routes JetBlue was speaking about. Additionally looking at frequencies the Spirit leaders pointed to daily 2:1 and 3:1, of which the Frontier has fewer overlapping routes than the JetBlue deal would. The route overlaps also don’t involve restricted airports and primarily involve the Orlando and Las Vegas Airports. In conclusion on the subject, the hosts stated that there were no overlaps on 89% of the Spirit and Frontier networks when you look at daily non-stop service.
The conversation pivoted to projections from Wall Street and consensus on future valuations. Spirit believes that the value to the shareholders comes from the merger with Frontier, emerging from the economic downturn caused by the pandemic, and synergies that will come from merging with very similar carriers. Because of the timeline to complete and the threat of litigation that the JetBlue offer would present the Spirit leadership team believes that they will be able to return more quickly and robustly to the needs of the shareholders with the Frontier deal. They pointed to the lower costs stimulating more travel and the fuel advantage that the younger fleet of NEO-equipped aircraft provides.
A representative from JP Morgan asked what consideration has the company shown to the pilots in a time of pilot shortages. The Spirit leaders pointed to increasing the size of the pilot training classes and stated that they are still seeing plenty of applications. Further, Ted stated, “right now they are not facing any immediate issues.” Spirit believes that the Frontier transaction enhances the value to Spirit pilots and Frontier pilots for a number of reasons. Specifically that the combined airline will be a much bigger, more stable airline. Being the fifth largest airline in the United States will bring more career opportunities, bases, and career stability through incremental opportunities to the pilots according to the Spirit leaders.
The final questioner wondered if the JetBlue offer was pursued and failed, would Frontier still be there? Ted initially pointed to the lack of wisdom in proceeding on a transaction by any board that would be seen as illusory speaking of the JetBlue deal. Stating that deal would bring multi-year substantial risk to Spirit Airlines when the shareholders already have a “bird in the hand” with the Frontier deal that creates “tremendous value.” Ted Added, “and in most cases, as history has proven out, targets, in that case, get weaker over that period of time. In fact, I've seen data that suggests they usually trade down 25% or more over that window of time, especially if there is no transaction consummated and the reward from all of that is $200 million.”
Prior to the call Spirit Airlines published a document clearly denying the tender offer from JetBlue. Mac Gardner, Chairmen of the Board of Directors for Spirit Airlines was quoted stating: “JetBlue’s tender offer has not addressed the core issue of the significant completion risk and insufficient protections for Spirit stockholders. Based on our own research and the advice of antitrust and economic experts, our view is that the proposed combination of JetBlue and Spirit lacks any realistic likelihood of obtaining regulatory approval, while our company faces a long and bleak limbo period as we await resolution. In that scenario, a $1.83 per share reverse break-up fee will not come close to adequately compensating Spirit stockholders for the significant business disruption Spirit will face during what JetBlue acknowledges will be a protracted regulatory process. Our pending merger with Frontier is advancing as planned, and we continue to recommend that Spirit stockholders vote FOR the merger with Frontier on June 10th, as we believe the combination of these two ULCCs is the best way to deliver maximum value to Spirit stockholders.”
The Spirit Board recommends Spirit stockholders reject the offer for the following reasons with expanded bullets available here:
The JetBlue transaction faces very substantial regulatory hurdles, especially while the NEA is in effect
JetBlue’s proposed divestitures are highly unlikely to resolve the DOJ’s concerns given the NEA’s alignment of JetBlue’s and American’s incentives across the country
JetBlue’s offer puts the risk of the antitrust condition NOT being satisfied on Spirit stockholders
JetBlue’s conditions to the Offer also subject Spirit stockholders to significant risk from fluctuating market conditions and stock market volatility
Debt financing for an acquisition of Spirit by JetBlue remains questionable
If you have made it this far the document linked above is well worth the read. It dives into Spirit’s claims of misinformation and inaccurate characterization by JetBlue and clarity on Spirit’s perception of long-term shareholder benefits with a Frontier merger.