For three years now, Frontier and Spirit have been trying to merge. Oh sure, there was that little distraction when Spirit ditched Frontier for JetBlue, but the love never stopped burning in the background. It sounds like talks started to heat up again recently, but now, it has gone cold once again because they can’t agree on what Spirit is worth. (Spoiler alert: Spirit thinks it’s worth a lot more than Frontier does.)
Back in February 2022, Frontier and Spirit agreed to merge and all seemed right in the world. Frontier shareholders would get 51.5 percent of the combined company with Spirit getting 48.5 percent. For each share they owned, Spirit shareholders would get 1.9126 Frontier shares and $2.13. That was worth about $2.8 billion considering the share price at the time.
When JetBlue tried to blow up this plan, Frontier ended up raising the cash piece to $4.13 per share, adding another $200+ million in value. Despite Spirit’s management pleading for shareholders to take the deal, they would not. They chose JetBlue, and as we know, the Department of Justice (DOJ) shot that down and it all fell apart.
The time that passed was not good to Spirit. The airline was bleeding money and shrinking, and it was barreling toward bankruptcy. Apparently last summer, Frontier saw this and decided to take another run at a merger at a greatly reduced value.
The airlines disclosed in an SEC filing that last summer’s discussions involved Spirit stakeholders getting only 26.5 percent of the combined company plus $580 million paid toward debt. Spirit said at the time that its bondholders weren’t happy with that, so nothing happened. But then in November, Spirit ran out of time and filed for Chapter 11 bankruptcy protection.
Now with Spirit in bankruptcy, Frontier decided it was a good time to try and make a run once again before the airline exited on its own. This time, with Spirit in bankruptcy, it had a further revised offer. Can you guess which way it was revised?
The new offer was for Spirit’s various stakeholders to get a mere 19 percent of the combined company. In addition, Frontier would put in $400 million toward debt, but there’s a catch. This plan requires Spirit’s creditors to issue $350 million worth of debt to pay off the debtor-in-possession financing used in bankruptcy. Oh my, how the mighty have fallen.
Spirit’s response to this was a hearty middle finger. Actually, it didn’t start off that strong. In a letter, the airline said it absolutely sees a lot of merit in the combination but also… this offer is a joke. The airline had a ton of questions about details, but in general, this sums it up well:
…we have discussed the new Frontier proposal with the advisors to our bondholders as contemplated by your letter and required by our restructuring support agreement. We are told they believe your current proposal is so insufficient as not to merit a counter.
Right, so, take that Frontier. Frontier hoped it could change Spirit’s mind by putting together a nifty Powerpoint presentation. There was some back and forth, but the two airlines were really talking past each other and not getting the answers that were truly needed. (You really should read the SEC filing to get a feel for this.)
Spirit basically left it this way at last check:
- the demand for creditors to pour in $350 million is not ok
- this deal is costly and more notably, risky, in that it extends the amount of time before Spirit comes out of bankruptcy until the merger could be completed
- the proposal is “woefully insufficient financially”
In effect, Spirit says that it doesn’t have time for these shenanigans any longer, and it needs to finish up and exit bankruptcy protection as a standalone airline. It can’t waste any more time on something that creditors won’t even consider worthy of a response.
From Frontier’s perspective, this might be the end of discussion. In an email buried in that SEC where it tried to answer some questions, Frontier noted that it wants to do the combination in bankruptcy and onl in bankruptcy, because it is not a believer in Spirit’s standalone plan. Frontier CEO Barry Biffle bluntly explained, “you will emerge highly levered, losing money at the operating level and this would not be a transaction we would pursue.”
Further, Barry says that the airline will be so weak and vulnerable that other airlines could very well try to finish it off, and that might happen before a merger could even be completed because of how bad the exit plan is in Frontier’s eyes. Spirit, obviously, feels different. It says it likes its plan. Of course, what else can it say?
Could this be all talk and a deal might still get done? Of course. In fact, I wouldn’t be surprised if a new press release announcing a merger does come soon. It’s still entirely possible that Frontier could raise its offer and Spirit will rapidly reverse course, but the fact that this whole conversation was released publicly and Spirit confirms it let the NDAs expire suggests that we may have hit an impasse.
What does seem clear is that it’s going to make it a lot tougher to make this deal work if Spirit exits bankruptcy on its own. At least, that’ll be true unless Frontier is right and other airlines beat Spirit down toward bankruptcy. At that point, maybe Frontier could pick up the nearly-dead carcass for a song… but only if Frontier is right.
