Shares of Spirit rose more than 22% on Tuesday, while shares of JetBlue declined 7.1% at yesterday’s close.
The proposed offer follows the deal announced in February by Frontier Group Holdings Inc. (ULCC), another ultra-low-cost carrier, to buy Spirit for $2.9 billion in cash and stock. According to JetBlue, its offer provides a better opportunity for Spirit investors and represents a 37% premium to Frontier’s deal value. However, Frontier has offered Spirit’s existing shareholders to retain a 48.5% stake in the combined company.
Backing up the deal, JetBlue CEO Robin Hayes said, “Customers shouldn’t have to choose between a low fare and a great experience, and JetBlue has shown it’s possible to have both…The combination of JetBlue and Spirit – coupled with the incredible benefits of our Northeast Alliance with American Airlines – would be a game-changer in our ability to deliver superior value on a national scale to customers, crewmembers, communities, and shareholders.”
Per Spirit’s statement, its Board of Directors will evaluate JetBlue’s proposal with its financial and legal advisors’ team and will “pursue the course of action it determines to be in the best interests of Spirit and its stockholders.”
Terms of the Acquisition
Per the terms of the deal, JetBlue will pay $33 for each share of Spirit. The price tag represents a 52% premium to the undisturbed share price on February 4, 2022, and a 50% premium to SAVE’s closing price on April 4, 2022.
The transaction is likely to be funded with cash in hand and debt financing.
The merger agreement will be executed post approval from the Board of Directors of both carriers, JetBlue and Spirit. Thereafter, the completion of the deal will be subject to necessary regulatory approvals and approval of Spirit’s shareholders, along with other conditions.
If the deal is accomplished, the combined company will operate under the JetBlue brand and will be headquartered in New York. Additionally, the combined airline will have 32,000 crew members.
Benefits of the Deal
According to JetBlue, its merger with Spirit will create the fifth-largest customer-centric and low-fare domestic airline in the market, challenging the dominance of the four largest U.S. carriers, which control over 80% of the domestic market.
JetBlue has a strong foothold in New York and Boston through Northeast Alliance (NEA) with American Airlines (AAL). However, this alliance has been sued by the Department of Justice (DoJ) last year, which alleged that the partnership would reduce competition and lead to elevated fares. Both the DoJ and American Airlines refrained from comments.
The merger with Spirit will complement JetBlue’s position in the northeast and expands its presence in the country, with strong command in Florida, Spirit’s existing headquarters.
“Throughout the pandemic, Florida has been a bright spot for JetBlue, and this would offer us the opportunity to hire even more crewmembers in the state, increase service in Fort Lauderdale-Hollywood International Airport (FLL) and Orlando International Airport (MCO) for our customers, and further expand our training and support center footprint,” Hayes said.
Through the merger, JetBlue’s network strategy will be enhanced across the U.S., Caribbean, and Latin America, serving more than 77 million customers annually. It is expected to ply more than 1,700 daily flights to over 130 places.
Additionally, the combined fleet with Spirit is expected to aid the airline’s transition to next-generation aircraft, which is aimed to be modern and fuel-efficient to attain sustainability. JetBlue intends to achieve net-zero carbon emissions by 2040.
On completion of the integration, the deal is expected to yield $600-$700 million in net annual synergies. Furthermore, annual revenues of around $11.9 billion are expected based on revenues recorded in 2019. The transaction is likely to be accretive to earnings per share in the first full year, excluding integration costs.
Wall Street’s Take
Recently, Morgan Stanley analyst Ravi Shanker maintained a Buy rating on JetBlue but lowered the price target of $22 from $23. This indicates a 61.29% upside potential from Tuesday’s closing price of $13.64 per share.
The rest of the Street is cautiously optimistic about the stock, with a Moderate Buy consensus rating based on three Buys and four Holds. The average JetBlue price target of $19.20 implies 49.3% upside potential. Shares have lost 39% over the past year.
News Sentiment for JetBlue is Positive based on 52 articles over the past seven days. 100% of the articles have a Bullish Sentiment, compared to a sector average of 63%.
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