Frontier and Spirit in Disagreement Over Merger Terms
Frontier and Spirit have been engaged in a tug-of-war over a potential merger for the past three years. Despite a brief hiatus when Spirit diverted its attention to JetBlue, the desire to combine forces remained strong in the background. Recent discussions hinted at a revival of the merger talks, only to hit a stumbling block due to a fundamental disagreement – the valuation of Spirit.
The initial agreement between Frontier and Spirit back in February 2022 seemed promising. Frontier shareholders were slated to receive 51.5 percent of the merged entity, with Spirit holding onto 48.5 percent. Spirit shareholders would have been entitled to 1.9126 Frontier shares and $2.13 for each share they owned, amounting to approximately $2.8 billion based on the prevailing share price.
However, JetBlue’s intervention prompted Frontier to sweeten the deal by increasing the cash component to $4.13 per share, injecting over $200 million additional value. Despite management’s endorsement of the revised offer, Spirit’s shareholders opted for JetBlue, a move that was later thwarted by the Department of Justice (DOJ).
As time elapsed, Spirit found itself in a precarious financial position, teetering on the brink of bankruptcy amidst financial challenges and a shrinking operation. Recognizing an opportunity, Frontier, last summer, revisited the prospect of a merger at a significantly reduced valuation, offering Spirit stakeholders a diminished 26.5 percent stake in the combined entity along with a $580 million infusion towards debt repayment.
While Spirit’s bondholders expressed displeasure with the revised terms, the airline eventually succumbed to bankruptcy in November due to mounting pressures. Seizing the moment, Frontier extended another revised offer to Spirit amid its bankruptcy proceedings, proposing a mere 19 percent share in the merged company coupled with a $400 million debt repayment with a caveat requiring Spirit’s creditors to raise an additional $350 million to retire the bankruptcy-related financing.
Spirit’s response was unequivocal in its dissent, dismissing Frontier’s proposal as grossly inadequate and unviable due to far-reaching financial and operational implications. Citing concerns over prolonged bankruptcy proceedings and heightened financial risk, Spirit deemed the merger terms untenable and incompatible with its objectives, signaling an impasse in the negotiation process.
Frontier’s persistence in pressing for a merger highlights its skepticism towards Spirit’s standalone prospects post-bankruptcy, cautioning against the airline’s vulnerability to potential external threats and operational challenges. The contrasting viewpoints between the two carriers underscore the complexity and uncertainty surrounding the proposed merger, with each party asserting its position adamantly.
While speculation persists on the possibility of a last-minute breakthrough or revised offer, the public airing of grievances and expiration of non-disclosure agreements suggest a looming deadlock in the negotiation process. The prospect of Spirit emerging from bankruptcy independently could pose challenges to the feasibility and desirability of a future merger, potentially altering the dynamics of the aviation landscape significantly. Unless a viable resolution is reached promptly, the pathway to a successful merger remains fraught with obstacles and uncertainties, casting a shadow over the anticipated consolidation between Frontier and Spirit in the foreseeable future.