Frontier’s break-up fee

Frontier’s break-up fee

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Low-cost airlines Frontier (ULCC) and JetBlue (JBLU) are locked in a bidding war over mutual competitor Spirit Airlines (SAVE). Last week, Frontier added a $250m reverse breakup fee, approximately $2.23 a share, to the merger proposal it made earlier this year. The move is an attempt to deflect the bid JetBlue made in April.

The reverse breakup fee refers to an amount of money paid to a target company’s shareholders should a potential acquirer back out of a deal, making an acquisition offer more attractive.

Jetblue is taking a more aggressive approach after the low-cost airline rejected its initial offer. Currently, it is proposing Spirit shareholders $30 in cash per share, outdoing Frontier’s offer of $25.83 a share.

However, Spirit’s chairman Mac Gardner is more pleased with the Frontier offer, stating “the combination of a higher reverse termination fee and a much greater likelihood to close in a Frontier merger provides substantially more regulatory protection for Spirit stockholders than the transaction proposed by JetBlue.”

Why it matters

Spirit shareholders are scheduled to vote on Frontier's bid on June 10th. JetBlue's $3.6b cash offer is well above Frontier's $2.9b cash and stock offer, but Frontier's is looking like the more attractive option right now. It would allow Spirit to continue operating as a brand, while JetBlue would simply absorb the airline with the potential to stop the two carriers from becoming a stronger competitor. 

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