In July 2022, JetBlue Airways (Nasdaq: JBLU) announced that it was acquiring Spirit Airlines (NYSE: SAVE).
The agreed-upon purchase price was $33.50 per share in cash.
JetBlue expected the closing of the acquisition to occur in early 2024.
However, in a not completely unexpected turn of events, the Department of Justice filed an antitrust suit to block the deal in March 2023.
The DOJ’s complaint alleged that the combination of the two airlines would eliminate competition, raise prices and harm consumers.
With the matter still unresolved nine months later, the stock market has lost interest in this transaction.
Spirit’s share price currently hovers near $14… less than half of the all-cash $33.50 buyout price.
If this deal goes through, investors who bought shares at current prices are going to make out very well in a hurry.
The trial to decide the outcome of the deal concluded earlier this week, having started on October 31 in the U.S. District Court in Boston.
I don’t know what the judge will decide…
But what I do know is that there is a strong case to be made that this deal should go through. This merger wouldn’t be bad for competition; in fact, it would be good for competition.
The combination of Spirit and JetBlue would create the fifth-largest airline in the country. The resulting company would be capable of competing with the four major airlines (Delta, Southwest, American and United), which currently control 80% of the market.
Shouldn’t we want a low-cost option that is big enough to compete with the largest airlines? Wouldn’t that be good for us as consumers?
Of course it would!
My take is that the odds of the transaction getting approved are at least 50-50.
Plus, there is a very good chance that JetBlue could reach a deal with the DOJ that would allow the transaction to go through.
This could include some kind of concession to ease the DOJ’s antitrust concerns, like JetBlue selling off some prime gates at key airports.
Again, if the deal goes through, we are talking about more than a doubling of Spirit’s share price in very short order.
Meanwhile, if the deal doesn’t get approved, I still think buying shares of Spirit Airlines at current prices is a good value proposition.
The only time Spirit’s share price has been this low was at the bottom of the COVID-19 crash in March 2020, when most planes were being grounded for the foreseeable future.
Spirit currently trades at 1.18 times its tangible book value of $12 per share, one of the lowest valuations in the company’s history.
Spirit’s most direct competitor among ultra-low-cost airlines, Frontier Group (Nasdaq: ULCC), is trading at 1.7 times its tangible book value, which makes it 44% more expensive than Spirit.
To me, that’s another sign that Spirit’s shares are unusually cheap and that the current share price is quite attractive.
There seems to be very little downside at this price.
At this point, buying shares of Spirit Airlines is very much like a coin flip.
On one side of the coin, if the deal with JetBlue goes through, buying shares of Spirit at $14 is going to be a home run investment. (The buyout price of $33.50 is a 139% premium to the current price!)
On the flip side, if the deal doesn’t go through, we’d still own shares of Spirit at an unusually low level and an attractive valuation.
The Value Meter rates Spirit Airlines as being “Slightly Undervalued”… and that’s a conservative evaluation.
If the JetBlue/Spirit deal gets approved, that rating is going to look far too pessimistic!
— Marc Lichtenfeld
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Source: Wealthy Retirement