December 7, 2024 / VOLUME NO. 343

Not All M&A Is Good M&A

Just a few short years ago, Spirit Airlines was in an enviable position as a seller. The discount airline agreed to sell to Frontier Group Holdings in 2022, only to find JetBlue Airways Corp. swoop in with a better deal. 

As the advisory and valuation firm Mercer Capital notes in a blog post on the subject, JetBlue offered a 30% higher price than Frontier did. JetBlue further sweetened the deal with up to $425 million of downside protection in case the deal fell through. 

Apparently, it was tough to say no. But the highest priced offer is not always the best one, as Spirit Airlines’ board would soon find out.

“Spirit’s shares never traded remotely close to the announced deal value because investors correctly concluded that the Department of Justice would successfully challenge a merger that would eliminate a low-cost carrier while positioning JetBlue as the fifth largest carrier,” writes Mercer Capital’s Jeff Davis. 

Both deals had regulatory risk, but shareholders viewed JetBlue’s risk as higher, Davis says. Sure enough, the U.S. Department of Justice sued to block JetBlue’s purchase in March of 2023, citing concerns that the consolidation would limit choices for consumers and drive up prices, according to the Associated Press. The lawsuit noted that average fares fall 17% when Spirit enters a route, and fares rise 30% when Spirit leaves a route. 

But the ultra-low cost carrier hasn’t benefited in the same way that consumers have. Fares for leisure travel fell this summer and labor costs have risen. Plus, problems with Pratt & Whitney engines have grounded dozens of Spirit’s jets. Last month, Spirit filed for Chapter 11 bankruptcy protection after the merger fell through. Spirit’s stock price was trading mid-week at 82 cents per share, down 99% from 10 years ago. 

“… The Spirit board took a risk that it could get a better deal than Frontier’s and thereby wiped out its common shareholders in the bankruptcy filing,” Davis writes. One consideration in M&A for all boards, whether they’re airlines or banks, is not whether they can get the best price. It’s whether they can close the deal. 

• Naomi Snyder, editor-in-chief for Bank Director

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— Kirk Hovde, Hovde Group

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