July 29, 2022

Breakingviews: JetBlue buckles up for long, turbulent M&A flight

by Breakingviews.

It took a nearly four-month bidding war, but U.S. carrier JetBlue Airways has sealed a $3.8 billion deal with ultra-budget peer Spirit Airlines. Now, it must convince merger-wary regulators that the tie-up isn’t bad for competition. If it fails – and it might – the cost for JetBlue is dear.

JetBlue boss Robin Hayes saw off a rival bid from low-cost Frontier by offering two things: cash, and security. The company’s all-cash offer beat a mostly-stock bid from Frontier that looked worse by the day as the equity markets weakened. And it agreed to shoulder an increasing share of the risk that the Department of Justice might block the deal. That’s entirely possible, given the watchdog is already suing JetBlue over a partnership with American Airlines. JetBlue has therefore agreed to pay a lump sum if the deal stalls, and a series of small payments called “ticking fees” in the meantime.

All told, JetBlue could owe a lot. If the deal takes until July 2024 to either get approval or fall apart, the ticking fee could add up to an extra $70 million. And if it does collapse, the break fee is $470 million. JetBlue could find itself with no deal yet having paid Spirit $540 million, equivalent to a fifth of the would-be buyer’s current market capitalization.

Hayes must think this potential heavy toll is worth it. Pilots are in such short supply that some in Congress want to raise the profession’s mandatory retirement age. Airplanes, too, may be scarce – Airbus, on whose planes both JetBlue and Spirit rely, said on Wednesday that production will ramp up more slowly than expected this year. Even though JetBlue will incur big costs if the transaction closes from lifting Spirit pilots’ pay to match its own and overhauling the company’s airplanes, it might be the only way to get more of both.

Besides, JetBlue predicts big benefits from ramping up, to the tune of $700 million in extra annual profit. Taxed and capitalized, that’s $5.5 billion – roughly double the company’s current market capitalization. By sending Frontier packing, Spirit has taken a route that’s riskier, but more rewarding if all goes well. For JetBlue, that’s doubly true.



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