The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Jonathan Guilford
NEW YORK, Feb 12 (Reuters Breakingviews) - A bucketful of crabs keeps impeding a perfectly sensible merger. For three years, budget carrier Frontier has been trying to buy rival Spirit Airlines SAVEQ.PK, chumming offers with a bundle of shared synergies. First, shareholders clawed at the deal, and now creditors are doing the same. Like crustaceans clambering to escape containment, they’re sabotaging the sanest result out of self-interest.
Frontier and Spirit first tried to unite in 2022, before JetBlue Airways JBLU.O intervened. Spirit’s protestations were ultimately proved right when a judge blocked the JetBlue acquisition. Amid the antitrust fervor under former U.S. President Joe Biden, however, equity investors envisioned a corporate combination that plausibly offered more upside, even adjusting for risk.
Post-pandemic market changes and competition from no-frills tickets available on traditional airlines swung Spirit’s $335 million net profit in 2019 to a $447 million loss in 2023. The NYSE Arca Airline Index .XAL is down 34% from its 2021 peak.
The case for merging remains. Combining scarce assets such as routes and airport slots can be greater than the sum of their parts. Frontier ultimately withdrew its renewed acquisition proposals in 2024, however, as Spirit gushed red ink and sought bankruptcy protection in November.
Frontier’s latest entreaty projects $600 million of profit uplift from joining forces with Spirit. Taxed and capitalized, it would be worth roughly $5 billion today, or nearly as much as the Frontier enterprise, including aircraft leases.
The two management teams seem to agree on the upside. At this point, though, Frontier Chairman Bill Franke is negotiating with creditors. He’s offering them $400 million of restructured debt and almost a fifth of the combined company. Add Spirit’s $1 billion or so of expected 2026 EBITDAR to Frontier's $1.4 billion, according to Visible Alpha, and the enterprise would be worth about $8.8 billion on today’s valuation multiples. With the synergies included, it implies some $800 million of equity would accrue to lenders.
Using the same assumptions, Spirit’s standalone equity is probably worthless. But even with 100% of nothing, senior creditors would stand to receive $840 million in secured debt.
They’re a famously risk-averse bunch. Why surrender a protected claim for the uncertain promise of synergies? Before rejecting Frontier’s offer on Tuesday, noteholders demanded a “market-based mechanism” to guarantee them at least $1 billion of equity. It’s a reasonable enough negotiating tactic, but crabs are no better than snakes on a plane.
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CONTEXT NEWS
Budget U.S. carrier Spirit Airlines on February 11 rejected a revised acquisition offer from rival Frontier Airlines and said it would instead pursue a standalone plan to emerge from bankruptcy on February 13.
Frontier offered senior debtholders $400 million of restructured notes and 19% of the equity in the combined company. Under Spirit’s current plan, creditors would receive $840 million of restructured debt.
Airline stocks have been grounded https://reut.rs/3XmpGur
(Editing by Jeffrey Goldfarb and Streisand Neto)
((For previous columns by the author, Reuters customers can click on GUILFORD/ Jonathan.Guilford@thomsonreuters.com))
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