Spirit Airlines shareholders should vote against a proposed merger with Frontier Airlines in favor of a competing offer from JetBlue Airways, a prominent shareholder advisory firm recommended Tuesday.
The company, Institutional Shareholder Services, said that while JetBlue’s competitive offering might undergo more regulatory scrutiny, it would provide Spirit investors with more money and more choice, depending on whether they expect the recovery in travel demand to falter. Many major investors take ISS’s recommendations seriously when deciding how to vote on corporate proposals, director candidates and other matters.
“On balance, a potential deal with JetBlue appears to offer shareholders superior optionality, allowing those concerned about the coming turbulence to exit at a significant premium, while reinvesting those with a more optimistic perspective,” ISS said.
JetBlue’s cash offer represented a 56 percent premium to Frontier’s cash and stock offering as of last Wednesday, ISS said.
Spirit and Frontier announced a proposal to merge in February. Weeks later, JetBlue responded with an offer of its own. Spirit’s board of directors turned down that offer, urging shareholders to reject a subsequent takeover bid, arguing that the deal has little chance of being approved by antitrust regulators and may simply represent a “cynical attempt” to disrupt the merger.
Aviation analysts generally agree that a merger between Spirit and Frontier would be easier to execute because the airlines operate a similar low-cost business model with different geographic strengths.
The Spirit board’s assumption that the Frontier deal would have an easier path to regulatory approval seems reasonable, ISS said. But it added that Spirit’s complete lack of confidence in the JetBlue offering “seems much less.”
Both deals would be subject to significant scrutiny by the Biden administration, which has taken a more aggressive stance on antitrust matters. JetBlue has tried to address those concerns by promising to pay Spirit a $200 million termination fee if the merger is not approved. Frontier has made no such warranty.
Without a similar promise from Frontier, Spirit’s shareholders “appear to be better off rejecting the proposed transaction at this point, as a signal to the board of directors to be more productive with JetBlue,” according to ISS.
Spirit said the Frontier deal was in the best interest of shareholders and the company. Ted Christie, Spirit’s CEO, said in a statement that ISS seemed “too focused” on the relationship termination compensation and the “increased business interruption” Spirit could face in a lengthy review of the JetBlue deal by did not recognize the regulations.
“Our board of directors continues to unanimously recommend that Spirit’s shareholders vote in favor of the merger proposal with Frontier,” said Mr. Christie.
In a statement, JetBlue CEO Robin Hayes said the ISS recommendation “highlights the flawed process” that Spirit’s board of directors has followed and underlines the need to restart negotiations “this time in good faith.”
Vanguard, BlackRock and Fidelity Investments are Spirit’s three largest institutional shareholders. All three declined to comment on their stance ahead of the June 10 vote on the Frontier deal.