Spirit-Frontier Deal Backed by ISS
The proxy adviser, which had recommended exploring bid from JetBlue, reverses position after Frontier boosted offer for Spirit
Proxy advisory firm Institutional Shareholder Services Inc. recommended Spirit Airlines Inc. SAVE 2.90%▲ investors vote for a proposed merger with Frontier Airlines, ULCC 6.57%▲ reversing its position on the deal after Frontier sweetened its offer Friday.
“On balance, support for the merger with Frontier on the revised terms is warranted,” ISS wrote in a report that was published late Friday and made public Saturday.
ISS had previously said Spirit investors would be better off rejecting that deal so Spirit could negotiate more seriously with JetBlue Airways Corp., JBLU 5.77%▲ which has also been vying to buy Spirit.
On Friday, Frontier Group Holdings Inc. raised its offer for Spirit, adding an additional $2 per share in cash. It also said it would prepay $2.22 per share, and increased the reverse termination fee it would pay to Spirit if regulators block the deal to $350 million, matching the reverse termination fee JetBlue had promised.
“Given these facts and circumstances, the current offer from Frontier appears preferable,” ISS wrote.
JetBlue had earlier this week sweetened its offer again to $33.50 per share, or roughly $3.7 billion. Frontier’s offer is a mixture of stock and $4.13 a share in cash, including the most recent increase. At Friday’s closing prices, the Frontier deal would be valued at about $2.7 billion.
While JetBlue’s offer is higher than the current value of Frontier’s, ISS said it “may appear to be opportunistic” given the potential value of an airline recovery. On the other hand, investors may prefer JetBlue’s cash deal, which could provide protection from a potential economic downturn, ISS said.
Frontier’s offer overall provides both potential upside compensation in the event that regulators bar a deal, ISS concluded.
“Shareholders have clearly benefited from the bidding war between Frontier and JetBlue,” ISS wrote.
JetBlue didn’t immediately comment on the ISS recommendation Saturday. On Friday JetBlue said that it believes its most recent offer is “decisively superior” to Frontier’s and that it would continue to campaign against the Frontier deal ahead of the upcoming Spirit shareholder vote, which is scheduled for June 30.
The new recommendation is a boon to Frontier’s efforts to buy Spirit, a rival discounter. The two airlines agreed to merge in February, but JetBlue later swooped in with an all-cash offer and has mounted an aggressive push to win over Spirit investors.
Spirit initially rejected JetBlue, saying that it didn’t believe antitrust regulators would sign off on that merger. JetBlue then launched a hostile bid, appealing to shareholders in hopes of pressuring Spirit management to reopen talks.
ISS originally said that the Spirit board’s view that the Frontier deal would have an easier regulatory path appeared reasonable. But, the firm said, both deals could face significant regulatory uncertainty, and JetBlue’s offer provided more certainty to shareholders if the deal was blocked.
When Frontier added a $250 million breakup fee to its offer, JetBlue quickly topped it.
Spirit delayed a shareholder vote that was originally scheduled for early this month in order to take more time to negotiate with both Frontier and JetBlue.
Swaths of investors vote in line with proxy advisory firms’ recommendations, making it risky for a company to hold a vote if it hasn’t won the advisory firms’ support. While another proxy advisory firm had backed the Frontier merger, an industry analyst had said Spirit and Frontier likely would need approval from ISS as well to go forward.