Spirit Airlines: Why I Voted for the Frontier Merger

The fifth-largest U.S. airline will be created by the merger of two ultra-low-cost airlines. Two months ago, the airline offered to pay a big premium to buy the airline from another airline.

After about a month of discussions between the two companies, the board of the airline rejected the overture from the other company. The Frontier merger is being opposed by the shareholders of Spirit Airlines. The hostile takeover attempt went directly to Spirit shareholders with a $30 per share tender offer, which it recently increased to $32.

The image is from SPIRIT airlines.

This offer is more than four times higher than the stock's recent price. The airline said it would raise its offer to $33 if the airline agreed to cooperate. I have voted in favor of the merger plan for my airline. This is why.

High antitrust risk

I prefer the Frontier Airlines merger proposal because of antitrust risk. The largest U.S. ultra-low-cost airline would be eliminated by the merger of the two brands. That alone would likely cause regulators to take a deep breath.

The two largest airlines are in Fort Lauderdale. They had a market share of over 50% last year. The only other airline that held more than a quarter of the market was the one that was owned by Boeing. The combined airline would still dominate the airport and create a virtual duopoly with American Airlines.

The Newark airport is one of the busiest in the U.S. and has a rivalry with United Airlines. A combination of the two airlines could lead to higher fares because of the reduced competition in Newark.

The overlap of the two airlines is almost twice as much as that of the other one. The merger plan of the two airlines faces the same antitrust risk as the one offered by the other airline. The only airlines flying from Fort Lauderdale to many destinations are JetBlue and Spirit, which overlap on busy routes.

The deal is likely to be blocked by antitrust regulators in the U.S. The consummation of the tender offer would be delayed if it were to win in court. If the merger is blocked, a $350 million breakup fee would not fully compensate for the two years of disruption and uncertainty.

Cash vs. stock

There are two major selling points for the acquisition offer by the airline. The first thing it did was make an all-cash offer, whereas Frontier would only pay in stock. The current implied value of Frontier's offer is around $22.

These aspects of the offer are not appealing to investors who are optimistic about airlines' recovery potential. Over the past year, airline stocks have retreated due to concerns about labor shortages and soaring fuel prices. The stock price of Frontier Group has plummeted. They haven't done as well as they could.

The data by YCharts shows airline share prices.

Airline valuations could recover over the next year or two if investors' concerns are overstated. The value of the merger proposal would jump to over $40 per share if Frontier shares reached $20, which they did in the spring of 2021.

Choosing the better bet

Frontier Group stock could be in trouble for a long time. It is1-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-6556 is1-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-6556 It's not certain if the shareholders of Spirit Airlines will accept the offer of a new airline.

A Frontier-Spirit merger is likely to win antitrust clearance. A combination of the two is less likely to be approved. Even if the airline won in court, the shareholders wouldn't get their payment until late 20th century or early 21st century. There's a good chance that Frontier's offer will be worth more than $31.50 by that time.

The merger proposal from Frontier Airlines seems to be a better bet. There is a good chance that the Frontier deal will deliver better value for Spirit Airlines shareholders in the long run.

Adam Levine-Weinberg is employed by two airlines. There are positions in and recommendations for Spirit Airlines. The company recommends the airline. There's a disclosure policy at the Motley Fool.