Sun. Sep 25th, 2022

As Spirit Airlines shareholders prepare to vote, the two suitor carriers have boosted their breakup fees, the M&A equivalent of wedding insurance.

There’s less than a week to go before Spirit Airlines stockholders vote on whether to accept a takeover bid from fellow low-cost carrier Frontier Airlines or to reject it and open the door to a more lucrative, hostile bid from JetBlue Airways.

Frontier has claimed the merger of two “complementary businesses” would “create America’s most competitive ultra-low fare airline for the benefit of consumers.” JetBlue, meanwhile, has argued that acquiring Spirit would allow it to compete with the so-called “Big Four” U.S. carriers – American, Delta, United, Southwest — that together control nearly 80% of the market.

Ahead of the June 10 vote, there’s some evidence that some Spirit investors were getting cold feet about the Frontier deal. While Frontier and JetBlue have gone tit-for-tat over recent weeks, progressively upping the ante in their appeals to Spirit investors, the latest round of offers is all about breakup fees.

Think of these fees as the mergers-and-acquisitions equivalent of wedding insurance, says antitrust expert Florian Ederer, associate professor of economics at the Yale School of Management. “If the shareholders vote in favor of a deal, and then later the deal does not go through because of antitrust scrutiny, the shareholders are compensated,” he says, similarly to how the bride’s family might be covered by wedding insurance if one of the lovebirds had a change of heart.

A breakup fee is is is very common in large merger negotiations, says Ederer, especially where antitrust concerns are present. A classic example from over a decade ago is the $6 billion breakup fee associated with AT&T’s failed acquisition of T-Mobile. More recently, there’s a $1 billion breakup fee involved if Elon Musk’s acquisition of Twitter does not go through.

Last Tuesday, Reuters reported that proxy advisory firm Institutional Shareholder Services urged Spirit shareholders to reject the Frontier deal because there was no breakup fee. Two days later, Frontier agreed to pay a breakup fee of $250 million in its $2.9-billion bid to acquire Spirit, which would create the fifth-largest U.S. airline.

Then, this morning, JetBlue responded by raising its breakup fee from $200 million to $350 million in its $3.3-billion hostile bid. JetBlue also added a sweetener: an upfront payment of about $164 million payable as a cash dividend “promptly following” a vote approving a merger of the carriers.

Spirit’s board of directors is legally obligated to try to get the best possible value for their shareholders, says Ederer. The breakup fee is designed to protect Spirit shareholders for the time, resources and costs already poured into the acquisition process.

“It is a murky area,” says Ederer. On face value, JetBlue’s offer is stronger. “But the Spirit board could argue that the Frontier deal is better because the great synergies that exist between the two ultra-low-cost airlines, Fontier and Spirit, and the combination of assets, will eventually lead to a better long-term return. They could argue it’s something that the shareholders don’t see yet but that they will eventually be vindicated.”

Still, Ederer thinks that argument may have an uphill battle. “I would think that Spirit and Frontier merging is a bigger antitrust concern than Spirit and JetBlue merging,” says Ederer. “That’s because, while JetBlue is a low-cost carrier, it’s not necessarily an ultra-low-cost carrier like both both Spirit and Frontier. So I’d say that there’s a lower risk of the JetBlue-Spirit acquisition being blocked.”

Should the JetBlue-Spirit merger be approved, regulators will likely have a caveat, says Ederer, requiring JetBlue to pull out of a partnership that allows its frequent fliers to earn and redeem miles and points on American Airlines.

“It might be an easy out for the antitrust regulators,” says Ederer, “to say, ‘Look, we’re letting this acquisition go through, but you’re gonna have to abandon your Northeast Alliance with American Airlines.’”

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