Related Position Disclosure: I own 14,054 shares of SAVE.
Important Disclaimer: Nothing in this post is, or should be construed as investment advice. I describe my reasoning for why I did what I did. That doesn't mean it is a good idea for you. You can do your own research, consult a trusted financial advisor, or do whatever it is you think makes the most investing sense. What you shouldn't do is blindly follow me. I am not a financial advisor. I am an amateur investor, and any positive past performance I have enjoyed is not a guarantee of future success. All investments carry the risk of loss. This post discusses a particularly risky investment, which will probably not fit with the risk tolerance and goals of all investors.
Per the above disclosure, I am significantly invested in Spirit Airlines. This investment is recent. I am not posting because I want to pump up my stock. Rather, I recently acquired this position because of the reasoning contained herein.
Background:
Spirit Airlines (SAVE) has a deal inked to be acquired by JetBlue, which if it goes through, will result in spirit being acquired with a final payment to shareholders of $31/share. There are periodic monthly payments to spirit shareholders in the amount of $0.10. The deal is detailed and there are other provisions I don't mention here. You can, and probably should look into those yourself if you have any exposure to the deal. Financing for the deal has been secured. The DoJ has sued to block the merger, with the case currently going on in the U.S. District Court in Boston.
Downside and Upside potential:
At the time of writing, SAVE is trading at $11.34/share. That is 173% upside if the deal goes through, without counting the $0.10/share monthly payments. Spirit is experiencing severe difficulties as a company, due both to diminished demand and due to problems with aircraft engines which will keep numerous planes grounded over the next couple years. While there is a likelihood of a financial recovery related to delayed delivery of aircraft and defective engines, it is difficult to come to a figure for the fair value of spirit sans-merger. My own personal estimate is that on deal failure, SAVE would likely trade at around $5 per share, which would be a 56% loss on deal failure.
Lawsuit outlook:
I view the outlook as moderately favoring the deal being approved. JetBlue is the 6th largest airline in the US, and Spirit is the 7th. The acquisition would result in JetBlue being the 5th largest airline, with a market share of about 10%, in an industry that is dominated by the big 4 airlines. That is the single strongest argument for the merger. It is hard to see how this substantially lessens competition. There are more issues, however, when you get deep into the weeds.
There are some routes where Spirit and JetBlue could, in combination, have a dominant market share. The DoJ proposes that these be viewed as individual markets. JetBlue has made agreements for some divestitures of gates and routes to other Ultra Low Cost Carriers to endeavor to remedy these concerns, which DoJ believes are insufficient.
Spirit is the biggest Ultra Low Cost Carrier, and its absorption by JetBlue would mean the removal of seats from its planes and an increase in ticket costs, which the DoJ will argue will be a harm to consumers. JetBlue would argue that the increased amenities on JetBlue are a positive for consumers and that the merger will allow it to compete better with the big 4 airlines, creating a net positive for consumers.
It seems to me that the case against the deal was much stronger before the end of the Northeast Alliance, which involved a high degree of cooperation and coordination between JetBlue and American Airlines. Additionally, the financial difficulties of Spirit make it difficult to see the company surviving on its own without substantially increasing fares, which cuts against the DoJ case. In an industry dominated by American, Southwest, Delta, and United, it is hard to see the potential of a 5th strong competitor emerging as a problem for competition.
There remains some possibility that the DoJ and JetBlue will reach some kind of settlement that allows the deal to go through, producing a windfall for shareholders, but the odds of that happening diminish every day.
Other known risks:
There is a non-zero risk that JetBlue could endeavor to back out of the deal by arguing that Spirit has suffered a “Material Adverse Event”, in that its business has substantially diminished since the deal was struck. I view this risk as remote, given that an MAE is an incredibly difficult threshold under Delaware law, and because contract provisions specifically exclude industry-wide events from that definition, and because the aircraft engine issue does affect other airlines, even if not to the same extent that it affects Spirit, and also because the likelihood of financial compensation for this problem from the airplane manufacturer mitigates much of the potential harm in the long term.
There is some possibility that JetBlue could endeavor to reprice the deal lower, using the argument of a Material Adverse Event. It seems moderately likely to me that Spirit would accept a slight discount rather than litigate this issue, but a severe discount appears highly improbable, as Spirit would likely prevail in court if JetBlue were to endeavor to back out, financing is already secured, and the contract does provide the remedy of Specific performance.
Summary:
I view the odds of this deal being successfully completed at somewhere around 70%. That is no guarantee and of course reasonable minds may differ. The U.S. Government has recently been on a track of challenging mergers that would traditionally be approved, and this has caused them to lose some big cases (see the Microsoft-Activision or Meta-Within as examples). A few years ago, an antitrust challenge by the government was usually the death knell of a merger, but that is no longer the case.
If my proposition that this deal is 70% likely to be successful is correct, looking at a timeline resulting in payment early 2024, the risk/reward proposition looks favorable to me. That doesn't mean I'm right. It is just what I think.
Note: In the interest of writing a post, rather than writing a book, I've only included what I view as the most important information. There is a lot of other information. You might find the information I didn't include is more important to you than the information I did include. Please do your own research, and get advice from trusted financial advisors. I find this interesting, but I'd like to reiterate that my thoughts and musings are not and should not be considered investment advice.
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