‘Top Gun’ deal morphs into airlines’ fiercest M&A brawl in years

Robin Hayes was rousting his advisers within hours of Spirit Airlines Inc.’s February announcement that it would merge with Frontier Airlines.

The JetBlue Airways Corp. chief executive officer was caught off guard by the tie-up between the two deep discounters, even though it had been speculated for years by analysts and investors. The deal, codenamed Project Top Gun, was presented to the market as fully baked, with Spirit shareholders set to receive a combination of cash and Frontier Group Holdings Inc. shares valued at the time at $2.9 billion.

As Frontier’s management gathered that evening to celebrate with their advisers at Sparks Steak House in midtown Manhattan, JetBlue’s executive team—along with longtime adviser Goldman Sachs Group Inc. and Shearman & Sterling lawyers—agreed to meet the next day to consider a competing offer.

That meeting was the start of a months-long battle over Spirit, marked by a flurry of revised offers and a three-week delay in a crucial shareholder referendum. The latest of those bids came Monday, when JetBlue raised its offer to $33.50 per share, up from the $31.50 it offered on June 6. The new price values Spirit at about $3.7 billion.

JetBlue has managed to stymie a nearly sure-fire deal by forcing Spirit’s investors to wrestle with accepting less generous financial terms from Frontier. All three airlines have plenty riding on the outcome of the June 30 vote—delayed from June 10—and are spending the intervening days frantically courting investors to win their support. Spirit said in a statement Monday that its board will review the latest proposal and provide an update before the vote.

Either combination will bring a shift in the domestic US airline industry. A Frontier-Spirit deal would place a large deep discounter into the top ranks for the first time, trailing only the three major global carriers and Southwest Airlines Co., based on domestic passenger traffic. Picking up Spirit would cement JetBlue in the No. 5 spot, giving it the heft to potentially keep fares low across a broader swath of the country while wooing customers with its free Wi-Fi and help-yourself snacks. JetBlue also would gain access to existing aircraft orders and pilots, both of which are in short supply.

“There’s a land grab for aircraft and a land grab for cockpit resources; that’s what’s driving a lot of it,” said Jeff Potter, who was Frontier’s CEO until 2007. “There’s a strategic value to this, but also a defensive value. That’s why this battle has gotten so intense.”

The latest proposal sent Spirit’s shares up 6.3% to $22.63 at 9:38 a.m. Tuesday in New York. JetBlue fell less than 1% and Frontier rose 1.1%.

A win is critical for JetBlue, which lost out to Alaska Air Group Inc. in a 2016 battle over Virgin America, Potter said in an interview.

JetBlue was able to move quickly on a counterbid in part because Goldman had already polished the outline of a Spirit takeover in early 2020, according to people familiar with the matter. That plan—derailed when the Covid-19 pandemic nearly wiped out air travel—was revived during a spate of meetings held on Zoom, as well as some in person at Goldman’s Manhattan offices and JetBlue’s headquarters in Long Island City, New York, working under the codename Project Exchange.

Unsolicited Offer

On March 29, about seven weeks after the Frontier announcement, Hayes called Spirit CEO Ted Christie and outlined the details of JetBlue’s unsolicited $3.6 billion all-cash bid. That was followed by a written offer, after which JetBlue Chairman Peter Boneparth called Mac Gardner, his counterpart at Spirit, to ask for a timeline on engagement. Days passed without a reply, according to people familiar with the matter, who asked not to be identified because the talks were private.

It was a bold move for Hayes, who thought he would have a career in railroads before he took a summer job as an 18-year-old selling duty-free products at Boston’s Logan Airport, in a terminal now solely occupied by JetBlue. He was later hired by British Airways to check in passengers in Glasgow—the start of a 19-year career there. Hayes moved to the US as executive vice president for the Americas before joining JetBlue in 2008.

The 55-year-old London native doesn’t see himself as a risk taker. To him, the Spirit bid isn’t a huge gamble, but one of a rapidly shrinking number of opportunities to turbocharge JetBlue’s growth. Another plan for quick expansion—a commercial alliance with American Airlines Group Inc. known as the Northeast Alliance, or NEA—is the focus of a federal antitrust lawsuit seeking to shatter the partnership.

“I don’t want to go through life and never try to do things that make things better,” Hayes said in an interview. “Both NEA and Spirit will make JetBlue better. None of us should be consumed by the fear of failure or we’d never do anything. You’ve got to play to win.”

Frontier’s February bid for Spirit was the culmination of more than half a decade’s work spearheaded by Bill Franke, the carrier’s chairman and the self-proclaimed father of ultra-discounting. Franke, 85, has assembled a network of such carriers around the globe through his private equity firm, Indigo Partners.

Franke led Spirit’s conversion to a deep discounter about 15 years ago, before selling his stake to help buy Frontier out of bankruptcy in 2013 and convert it to the same model. Such carriers offer bare-bones fares while charging for extras like coffee or printed boarding passes. They count on low operating costs to help produce profits.

The ties also run deep among the airlines’ top executives: Spirit CEO Christie is a former Frontier finance chief, while Frontier CEO Barry Biffle served as chief marketing officer at Spirit from 2005 to 2013.

Delayed Plans

Franke’s plans for a combination were delayed while awaiting Frontier’s initial public offering, which eventually happened in 2021, and by the pandemic. But serious talks about a merger resumed last November. Meetings were held in person despite Franke’s age putting him at higher risk for Covid, with several advisers noting he moved with the energy of a man decades younger.

Spirit finally came back on April 7, agreeing to assess JetBlue’s initial bid. But the Miramar, Florida-based carrier’s board worried about JetBlue’s ability to quickly secure financing in a worsening economic environment and, more importantly, feared the combination would never be completed because of challenges from the Biden administration’s antitrust enforcers. That view was shared by Franke.

A Spirit-Frontier combination will also undergo an antitrust review, and the carriers might be required to give up gates at some space-constrained airports like Fort Lauderdale or Orlando in Florida, Raymond James Financial Inc. analyst Savanthi Syth has said. They could also face disclosure requirements or temporary caps on revenue from products or services outside of tickets—a major source of sales for both carriers.

As it considered terms for any JetBlue agreement, Spirit’s board asked the carrier to sever its ties to American Airlines via the NEA, a request that was promptly denied. That turned out to be all Spirit needed to reject the bid on May 2, declaring the Frontier deal its best shot at maximizing long-term value for shareholders.

JetBlue revealed the same day that it had already sweetened the bid to add a $200 million reverse breakup fee for Spirit investors if the deal failed on antitrust objections. It also offered to divest Spirit assets in New York and Boston to avoid gaining too big a slice of the market, and to consider surrendering gates at other airports where the carriers overlap. The offer that JetBlue made on Monday includes a stronger commitment to divest certain JetBlue and Spirit assets, though it stopped short of giving up anything included in the NEA.

The latest bid tops the amount that JetBlue first offered for Spirit, and is well above the carrier’s price when it went hostile in May and took a reduced $3.3 billion bid directly to shareholders, trimming the per-share amount to $30. At that point, JetBlue had offered to return to the original $33-per-share offer for a “consensual transaction.”

‘Hard to Defend’

“If you’re an ultra-low cost carrier, a merger with another ULCC makes a lot more fundamental competitive sense,” said George Ferguson, a Bloomberg Intelligence analyst. “From a strategic standpoint, I totally get why Spirit likes the Frontier merger better. From a financial standpoint, it’s really hard to defend.”

Stung by divergent recommendations from two proxy advisory firms, Frontier agreed this month to add a $250 million reverse breakup fee. Spirit has asked for more, and people involved in discussions said there may be flexibility on additional cash. JetBlue previously added a critical upfront cash payment of $164 million, or $1.50 a share, for Spirit shareholders.

As the vote approaches, JetBlue continues work it began months ago on plans to integrate Spirit’s operations into its own, Hayes said. His job likely isn’t on the line if he loses the battle, said Raymond James’s Syth and Samuel Engel, senior vice president of the aviation group at consultant ICF. Spirit’s board, meanwhile, is using the time for talks with its own investors and the bidders.

Frontier, for its part, could emerge as a winner whether it acquires Spirit or not. The end of Spirit as a deep discounter would leave that segment of the US industry largely in the hands of Frontier, with the ability to grow as rapidly as demand will support.

“We have seen again and again that there is no bottom to the American consumer’s appetite for the lowest fare,” Engel said.