Frontier Airlines is upping the ante in its pursuit of rival Spirit Airlines. Denver-based Frontier wants to buy Spirit in a multi-billion deal that would create the fifth-biggest airline in the United States and dominate the domestic ultra-low-cost-carrier market. Meanwhile, JetBlue has launched a hostile takeover bid of Spirit after JetBlue's previously friendly overtures were rejected. Now, to keep Spirit sweet, Frontier is offering the airline US$250 million even if antitrust authorities knock the planned merger back.

Easy money for Spirit Airlines

It's termed a breakup or reverse termination fee and is a guaranteed payment to Spirit Airlines to support Frontier's planned acquisition of it even if regulators block the deal. Spirit's investors are meeting to approve Frontier's bid next week, and this $250 million fee is, if you like, an extra incentive to support the bid.

Spirit's Chairman, Mac Gardner, supports Frontier's amended offer. "The combination of a higher reverse termination fee and a much greater likelihood to close in a Frontier merger provides substantially more regulatory protection for Spirit stockholders than the transaction proposed by JetBlue," he said today in a statement.

"We look forward to closing the transaction with Frontier and giving Spirit stockholders the opportunity to benefit from pandemic recovery and share in approximately $500 million in annual net synergies."

Spirit Airlines Airbus A320-271N
Frontier's proposed takeover of Spirit Airlines would create the biggest ULCC in the United States. Photo: Vincenzo Pace/Simple Flying

The $250 million offer equates to $2.23 per share and has the support of the directors of both airlines. Spirit's shareholder meeting is on June 10, and Spirit's directors are encouraging shareholders to give the buyout offer the nod. But not everyone is onboard with the planned merger. Institutional Shareholder Services Inc is a top proxy advisory firm that makes a crust advising shareholders on how to vote on big decisions like this one.

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Spirit backs Frontier's bid, pushes back against JetBlue

They've recently advised Spirit's shareholders to vote against the planned merger because JetBlue's offer is financially superior. JetBlue is offering $30 per share versus Frontier's cash-and-stock offer around the mid $22 mark. On this basis, supporting the JetBlue bid is a no-brainer. But there are a couple of crucial reasons why Spirit Airlines prefers the Frontier offer. Firstly, the deal is more likely to get approved by US antitrust authorities than the JetBlue offer. Secondly, Frontier Airlines is a far better cultural fit for Spirit than the more upscale JetBlue. JetBlue's proposed breakup fee of $1.83 per share didn't particularly impress Spirit's directors either.

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The carriers hope to have the deal done and dusted by early 2024. Photo: Getty Images

"Based on our own research and the advice of antitrust and economic experts, our view is that the proposed combination of JetBlue and Spirit lacks any realistic likelihood of obtaining regulatory approval, while our company faces a long and bleak limbo period as we await resolution. In that scenario, a $1.83 per share reverse breakup fee will not adequately compensate Spirit stockholders for the significant business disruption Spirit will face during what JetBlue acknowledges will be a protracted regulatory process," said Mac Gardner in May.

"Our pending merger with Frontier is advancing as planned, and we continue to recommend that Spirit stockholders vote for the merger with Frontier on June 10th, as we believe the combination of these two ULCCs is the best way to deliver maximum value to Spirit stockholders."

Whether shareholders agree, we'll know next week.