JBLU - Spirit Airlines Stock Pummeled After Court Blocks JetBlue Merger: What's Going On?

2024-01-18 17:10:26 ET

Summary

• A Massachusetts federal court blocked the merger between Spirit Airlines and JetBlue on antitrust grounds.
• Spirit stock has been demolished, falling from $16 at the start of the year to $5 this week.
• The road ahead for the common stock is brutal and you probably should take whatever you can get for it. However, the bonds could be worth a look.
• And are investors extrapolating too much about Spirit's antitrust denial to assume that the Hawaiian Airlines deal with Alaska Airlines won't close? The facts are different there, and investors can earn a 32% upside if the deal closes.

The ongoing Spirit Airlines ( SAVE ) saga continued this week when a Massachusetts federal court blocked Spirit Airlines' merger with JetBlue ( JBLU ) on antitrust grounds. This case is one of the wilder business stories of the last few years, with Spirit rejecting a bid of about $25 per share from rival airline Frontier ( ULCC ) in favor of an all-cash offer of $33.50 from JetBlue. In the end, the Biden administration apparently has blown up the merger , causing Spirit stock to enter a tailspin. Spirit traded for about $15-$16 earlier this month but now has plummeted to around $5 per share. By spurning the bird in the hand for JetBlue's bird in the bush, SAVE shareholders are likely to be left with little to nothing.

This is what Bloomberg's Matt Levine had to say about the deal this week:

The board thought this was a mistake, because the JetBlue deal would not go through. It argued this vehemently, but it lost the argument: The Frontier deal required shareholder approval, and it was clear that shareholders would not approve it because they wanted JetBlue's cash. So in July 2022, Spirit's board caved and signed with JetBlue . ("Spirit Had No Choice But Heed Investors and Jilt Frontier," wrote my Bloomberg Opinion colleague Brooke Sutherland .) And then, as Spirit's board predicted, the Justice Department sued, and it won, and now, a year and a half later, Spirit has no deal at all.

Why Spirit Airlines Stock Is Getting Crushed

In early January, the Spirit deal was a double-or-nothing situation. If the court had ruled in their favor, you'd have doubled your money in a matter of weeks. Because the court ruled against them, the stock was quickly cut in half. If you were quick, you could have gotten out for around $8 earlier this week. Now the market is offering about $5 to $6, which you should probably still take. Because the deal was seen as more likely than not to go through, you're making money in the long run if you double when you win and only lose half when you lose.

Spirit Airlines' future now appears murky. The company is losing about $500 million per year , and they're likely to lose a similar amount going forward. They reportedly have engine issues on planes forcing them to ground part of their fleet, they had to sell planes to raise money, the airline industry is likely oversupplied after carriers ramped up flights during the FOMO travel boom in 2022 and early 2023, and big debts are about to come due. Analysts are reportedly starting to call for the company to potentially file for bankruptcy. The Wall Street Journal reported today that Spirit is apparently " exploring its options " for restructuring. Sources close to Spirit later denied this to Reuters . JetBlue's CEO announced plans to step down as well, citing doctor's advice .

However, the drumbeat from analysts strikes me as maybe a shade too alarmist. My opinion is that they'll have some time to work things out. The company has about $929 million in cash , and the book value is about $12 per share. The problem with stocks any time a merger breaks is that all the merger arbitrageurs want to sell but no one wants to buy, so the price has to go extremely low for the market to clear. You might not want to buy the stock, but the bonds might benefit from the situation being somewhat better than it appears at first glance. More on this later.

Does The Government Get It?

I'll also take a minute to say how crazy this ruling is. While all the lawyers in the comment section are likely to say it's not the court's job to consider anything other than the technical details of the law in cases like these, the Biden administration may have walked into a political trap by blocking the merger of these two airlines. By blocking the Spirit merger, their stated aim is to keep more competition in the airline industry. That's all well and good, but if Spirit goes bankrupt, it may get liquidated , the employees all get laid off, and the planes get shipped off to Asia or wherever the highest demand for planes is. That's a terrible outcome for consumers, and if it happens, the Big Four airlines are likely to be thrilled to have one less competitor to deal with and should be able to promptly increase ticket prices.

Between billions in COVID-19 bailouts and a slew of favorable laws and subsidies, airlines seem to earn an astronomical return on roughly $30 million per year in lobbying. The same sources show that entities connected to Spirit Airlines only spent $8,500 on campaign contributions and nothing on lobbying last year. The famous poker proverb applies to politics as well - if you can't spot the sucker at the table, the sucker is you.

Don't Buy Spirit Stock, But Consider Buying The Bonds

If you bought Spirit stock before the ruling, you're beat. JetBlue got out of paying $33 per share for a company that's trading for $5, so there's not going to be any effort at an appeal. You can sell the stock now and get back part of your original investment.

What's more interesting now - the bonds. Because Spirit is going to have a hard time staying in business, it's possible that the Biden administration will change its tune on a merger if it becomes clear that the airline will liquidate, lay off all its employees, and ship all its planes to buyers abroad.

Spirit has multiple classes of bonds outstanding, but the most investor interest is around their 8% bonds due in 2025. If you're tempted to buy the stock, you probably should stay away and buy bonds instead, they're trading around 50 cents on the dollar. The bonds aren't easy to find, you can check with your broker to see if they have any available. You might have to call around. Bonds don't trade on a centralized exchange - that's why the Bloomberg terminal exists. Airline bonds are weird, sometimes there's collateral attached and sometimes there isn't. But in the case that Spirit gets bought out for $1 per share or something you'd double your money plus interest. Similar trades worked out well with regional bank bonds for those who did their homework. Heads you win - tails the shareholders get wiped out first.

Another interesting trade: Hawaiian Airlines ( HA ) has a deal for $18 per share to be bought out by Alaska Airlines ( ALK ). This deal isn't nearly as contentious from an antitrust perspective, but the perception is now that the Biden admin will block every deal. I don't think this is true, and you can make a roughly 32% return if the deal goes through. It's not as risky of a deal, but there is some risk - I'm not sure if Hawaiian Airlines can survive a recession either, so they'll need the deal to go through or the stock has downside to $5 or so. I view this one as 80%-90% to close though, just as Frontier's acquisition of Spirit would have been if shareholders had chosen their deal.

Bottom Line

Spirit Airlines stock is getting pummeled after its merger with JetBlue was blocked in federal court. The company has a book value of $12 but a highly uncertain path forward. I wouldn't touch the stock, but if you can find bonds trading for a deep discount, you'd benefit from a potential buyout while shareholders take the brunt of the risk. Also, consider whether Hawaiian Airlines stock might be worth buying with investors panicking over antitrust concerns.

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