Mini-Case Two Suitors Seek to Acquire Low-Budget Spirit Airlines Two trends have predominated the airline industry over the past few decades. The first is industry consolidation. To name just a few of the larger mergers since 2010: United Airlines acquired Continental Airlines in 2010 and ExpressJet Airlines in 2019; Southwest Airlines acquired AirTran Airways in 2010; Alaska Airlines acquired Virgin America in 2016; American Airlines merged with US Airways in 2013; British Airways merged with Iberia in 2011 to form International Airlines Group (IAG); IAG was in the process of acquiring Air Europa in 2022, with the full acquisition expected to be completed in 2023. The most commonly cited reasons for these mergers and acquisitions are to enhance efficiency through economies of scale and to provide customers with more routes and destinations.

The other important trend is the increasing popularity of low-priced, no frills airlines. In 2022, the United States had Spirit Airlines, Frontier Airlines, and JetBlue Airlines, although JetBlue offers more extras for customers than the other two. Europe had Ryanair, EasyJet, and Wizz Air, among others. In Asia, Scoot Airlines and Indigo competed in a crowded field. Fastjet and FlySafair were among the many low-priced carriers in Africa. These types of airlines continue to proliferate. In 2017, IAG created a new airline called LEVEL, offering low-cost pricing on long flights.

These two trends came together in the merger of Spirit Airlines with, well, somebody. Frontier Airlines was the first suitor, with a deal valued at $2.9 billion. Spirit took the deal. Then JetBlue offered $3.6 billion to take over the company. Both companies viewed Spirit as important to growing and becoming more competitive with the major airlines. Either deal would make the merged airline the fifth largest in the U.S. market. Both companies have accused the other of acting in bad faith.

Spirits board turned down the offer from JetBlue: Spirits board said it believed there was too much risk that regulators would bar a merger with JetBlue, even after JetBlue pledged to shed assets to win regulatory approval and to pay a $200 million breakup fee if it was unable to complete the proposed acquisition for anti-trust reasons. Nonetheless, the board viewed the JetBlue offer as too risky for shareholders.

When Spirit turned the offer down in favor of maintaining its deal with Frontier, JetBlue launched a hostile takeover attempt. JetBlue is appealing directly to shareholders by launching a tender offer for their shares, in hopes of pressuring Spirits management to re-engage in negotiations. The offering price for the tender offer was $30 per share compared to its initial offer of $33 per share; however, JetBlue said it would be willing to negotiate if Spirit provided some information needed for due diligence. The lower price was because of what JetBlue said was a lack of cooperation from Spirit in providing necessary information. JetBlue CEO Robin Hayes said, If the Spirit shareholders vote against the transaction with Frontier and compel the Spirit board to negotiate with us in good faith, we will work towards a consensual transaction at $33 per share, subject to receiving the information to support it.

JetBlue began meeting with Spirit shareholders to convince them that the JetBlue deal was in their best interests.

Although technically a large portion of shareholders must agree to tender their shares for a tender offer to be successful, in practice this often is not the case. If it appears that a deal is attractive to shareholders, reluctant boards will often change their positions and negotiate a deal. In this case, JetBlue won out in a deal valued at $3.8 billion.

Case Discussion Questions Of the reasons for acquisitions discussed in the chapter, which reasons are the primary drivers of the merger of Spirt Airlines with one of the two suitors? Beyond the two reasons mentioned in the case, are there others which would seem to apply to this situation?

If a company successfully completes a hostile takeover, is it more or less likely to be successful compared to a friendly merger? Why do you believe this is the case?

Is it ethical to entertain or even accept another deal when a board of directors already has an agreement with a previous company? Consider this question from the perspective of shareholders of the target company (e.g., Spirit), the shareholders of the suitor (JetBlue), and the shareholders of the firm with whom the firm already has an agreement (e.g., Frontier).

If you were a shareholder of Spirit Airlines as of the time of this case, what would you have wanted the board to do? Why?