Spirit Airlines Rejects Frontier Airlines’ Merger Offer As ‘Woefully Insufficient Financially’

Spirit Airlines and Frontier Airlines
have disclosed that on January 7, the latter proposed an acquisition of the latter, which Spirit Airlines eventually rejected, calling the offer “woefully insufficient financially,” among other things.

Woeful financial offer

In separate filings on January 29, Frontier Airlines and Spirit Airlines
disclosed that the former offered to acquire the latter on January 7. The offer was $400 million in take-back debt and 19% of Frontier Airlines shares to Spirit Airlines’ debtholders, with the proposal totaling no less than $2.1 billion.

However, Frontier Airlines outlined that its proposal included the assumption that Spirit Airlines’ creditors would complete the $350 million rights offering and would utilize the proceeds to retire the debtor-in-possession (DIP) financing upon its emergence from Chapter 11. Any excess liquidity would have gone into the combined entity’s balance sheet.

On January 11, Ted Christie, the president and chief executive officer (CEO), and McIntyre Gardner, the chairman of the board of Spirit Airlines, pointed out that during their last discussion in the summer and fall of 2024, Frontier Airlines offered $580 million in take-back debt and 26.5% of its equity.

“Please note that we have discussed the new Frontier proposal with the advisors to our bondholders […]. We are told they believe your current proposal is so insufficient as not to merit a counter.”

Photo: Ceri Breeze | Shutterstock

Furthermore, the offering party did not address the voluntarily bankrupt carrier’s now-drawn $300 million revolving credit facility (RCF) “or many other core matters.”

Following other exchanges and two Frontier Airlines’ presentations to Spirit Airlines, Christie and Gardner on January 28 said that despite the clear guidance the company had provided in the past weeks, Frontier Airlines failed to address their proposal’s “many deficiencies,” including the demand for $350 million in new funding from its creditors, the uncertainty regarding risk and cost of the merger, and the fact that the offer was “woefully insufficient financially.”

“[…] particularly when compared to the economic agreement we reached last Summer and Fall from which Frontier unilaterally walked away. Nor does it cover our funded debt or suffice to provide a recovery for equity.”

Related

Spirit Airlines Secures $300 Million In Financing

Spirit Airlines’ facility will become available once it emerges from Chapter 11 bankruptcy.

Why now?

In an email conversation on January 24, Barry Biffle, the president and CEO of Frontier Airlines, said that Spirit Airlines was about to exit its Chapter 11 bankruptcy proceedings and that it was proposing to continue the process for a few more months.

“Why does this need to happen now, why not wait until they [Spirit Airlines – ed. note] exit and then engage?”

In response to the rhetorical question that Biffle asked himself in the email, the executive said that Spirit Airlines would emerge highly leveraged, resulting in a transaction Frontier Airlines would not pursue.

Photo: Robin Guess | Shutterstock

Secondly, if Spirit Airlines emerges according to its plan – that includes the airline targeting more up-market leisure travelers – Biffle and his C-suite thought that the company would be “so weak” that it would attract attacks from competition, resulting in a prudent risk for Frontier Airlines to attempt the merger then.

“The sooner we can take control of the combined companies, the sooner we can stabilize [Spirit Airlines].”

Biffle said the situation was different from when Frontier Airlines walked away from a potential merger deal. Then, its due diligence discovered “several significant liquidity holes” that needed to be plugged, including a $500 million gap. Spirit Airlines’ recent actions, including the $350 million DIP financing, helped bridge that gap.

“Any external shock (competitive response, higher fuel prices, or the like) or a miss on your revenue forecast and the cash required to fund Spirit Airlines operations to a successful recovery could increase materially. There has been some relief in that revenue environment generally has improved, which mitigates some of what we saw as too large a risk.”

Spirit Airlines and Frontier Airlines had merger discussions during the second half of the year. However, these talks collapsed in mid-November 2024, which possibly contributed to Spirit Airlines filing for voluntary Chapter 11 bankruptcy on November 18, 2024.

Related

Spirit Airlines Files For Chapter 11 Bankruptcy Protection

Spirit Airlines assured its passengers that its operations will continue during the process.

Keeping the door open

In a presentation sent to Spirit Airlines management, Frontier Airlines argued that the combined entity would create the United States’ first low-cost carrier that had the scale to compete with the Big Four ( American Airlines
, Delta Air Lines
, Southwest Airlines
, and United Airlines
).

Frontier Airlines also saw issues with Spirit Airlines’ plan to continue as an independent airline, including the fact that its proposed business changes have significant execution risks. That was despite the fact that much like the latter, the former is also trying to go up-market with such initiatives as first class seating.

Still, the company argued that the bankrupt carrier would still have high leverage and that even without the potential synergy benefits, Frontier Airlines’ merger proposal would provide greater recovery for Spirit Airlines’ creditors.

Photo: Frontier Airlines

Christie and Gardner concluded their January 28 letter to Frontier Airlines that while Spirit Airlines’ board directed to proceed with the confirmation of its “extremely efficient standalone reorganization that will position us well for the future,” if Frontier Airlines were to make a proposal that would address the material deficiencies outlined by Spirit Airlines, its executives would be happy to consider the merger proposal.

The two airlines already had attempted a merger in 2022. However, JetBlue swooped in and offered a better cash alternative to Spirit Airlines’ shareholders, which they eventually voted to accept.

In March 2023, several states and the US Department of Justice (DOJ) sued the merger, successfully arguing in court that the combined JetBlue
-Spirit Airlines entity would not benefit US consumers, especially those relying on low-cost transportation to fly from, to, and within the country, essentially ending the merger in January 2024.

Related

Merger Blocked: What’s Next For JetBlue & Spirit Airlines

Seemingly, JetBlue and Spirit Airlines have to different futures ahead of them following a judge’s ruling against their merger.

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