A JetBlue Airlines plane is seen near Spirit Airlines planes at the Fort Lauderdale-Hollywood International Airport.
Joe Raedle/Getty Images
When uncertainty rules, it’s best to look for the nearly certain—and Spirit Airlines is almost certainly going to get bought. That makes its stock a good bet in a roiling market.
To recap: In early February, Spirit (ticker: SAVE) agreed to be bought by Frontier Group Holdings (ULCC) in cash and stock, a bid now valued at $19.73 a share. In April, JetBlue Airways (JBLU) made an unsolicited cash offer of $33 a share for Spirit, attempting to steal it away from Frontier. Despite the better price, Spirit announced this past week that it would stick with Frontier, citing its belief that the JetBlue deal wouldn’t pass regulatory muster.
That prompted JetBlue to go hostile and appeal directly to shareholders, offering to pay $30 a share for Spirit, the lower price perhaps reflecting the down market. Spirit stock jumped 7% on that news but has since given back all those gains. A shareholders’ vote on the Frontier acquisition is scheduled for June 10.
It’s quite a drama, but one that looks appealing for investors seeking a compelling risk-reward situation. If Spirit investors vote yes on June 10, someone who buys the stock now stands to make a few percentage points on the deal, reflecting the gap between the value of the Frontier offer and where Spirit stock is currently trading. If Spirit investors vote no, then JetBlue’s offer—which is 58% above Spirit’s current stock price of $18.99—is waiting in the wings.
Nothing is risk-free, though. For starters, Spirit’s and Frontier’s share prices are linked. If Frontier stock drops, Spirit will drop too. Of course, the vote is only about three weeks away, and a lot of bad news is already reflected in Spirit stock. Shares are down about 25% over the past month amid the broad market selloff.
Despite Spirit’s concerns, neither the Frontier nor JetBlue deal represents a major consolidation of market share for the U.S. airline industry. Combined, Spirit, JetBlue, and Frontier have roughly 10% of the planes in the U.S. and about 13% of the total miles flown by U.S. airlines. They just aren’t that big—even though regulators tend to look at market share by city or regional markets.
J.P. Morgan analyst Jamie Baker doesn’t see a reason either deal shouldn’t be approved. Still, the Justice Department is trying to block an alliance between American Airlines Group (AAL) and JetBlue, a decision that puzzles Baker. That might signal a higher level of scrutiny for airline mergers and be an omen that a JetBlue-Spirit merger is tougher to close.
If the Justice Department nixes any Spirit-JetBlue deal and JetBlue decided to litigate it, things could take a turn for the worse. Spirit reckons it would then take until 2024 or 2025 to consummate the deal, Cowen analyst Helane Becker tells Barron’s. “Spirit believes they will suffer from brain drain, and if the deal still doesn’t get approved, they won’t be able to run the airline,” she says.
The regulatory risk looks real, but investors don’t have to stick around until 2024 or 2025. Holding Spirit shares for a couple of weeks looks safe. And holding both Spirit and Frontier shares isn’t a bad idea either. If Frontier wins, there are deal synergies to be had and earnings estimates can rise, sending both shares higher.
If Spirit investors vote no, there shouldn’t be a huge impact on Frontier stock. Frontier shares moved about 3% higher immediately after the deal was announced and about 11% in the couple of days following. But they are down 35% since then. The market hasn’t been kind to many stocks lately.
If JetBlue pulls an upset and wins, growth estimates for Frontier should go up anyway. The JetBlue-Sprit combination will create some opportunity for new capacity, especially if regulators demand some route divestitures.
Holding both Spirit and Frontier isn’t a bad idea, fundamentally speaking, either. Fuel prices, pilot shortages, and aircraft-maker deliveries point to a tight supply situation down the road. Stocks can work even when deals break down completely.
Write to Al Root at [email protected]
