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The Spirit – JetBlue Antitrust Trial Kicks Off – Merger Arbitrage Mondays

  • November 6, 2023

Key Highlights

  • The antitrust trial challenging the merger of Spirit Airlines (SAVE) and JetBlue (JBLU) kicked off on October 31.
  • Two multi-billion dollar REIT deals were announced last week.
  • Six Flags Entertainment Corporation (SIX) and Cedar Fair (FUN) to combine in an all-stock merger of equals transaction, for an enterprise value of approximately $8 billion.
  • Senate Majority Leader Chuck Schumer calls for FTC scrutiny of potential antitrust law violations in Exxon Mobil (XOM) and Chevron Corp.’s (CVX) oil and gas acquisitions.

Spirit Airlines (SAVE) $11.26

Market Cap: $1.23 billion

Enterprise Value: $6.9 billion

In the past two years, we have written multiple articles about Spirit Airlines in our Merger Arbitrage Mondays posts. The company was also the spotlight idea for our Special Situation Newsletters in September 2022 and October 2023.

With a spread of over 175%, Spirit Airlines has occupied the top place in our Merger Arbitrage Tool for several months and the arbitrage situation is generating a lot of interest among risk-takers.

Following seven rounds of intense bidding between Frontier Group (ULCC) and JetBlue (JBLU) in 2022, JetBlue ultimately prevailed as the winner, securing a $33.50 all-cash agreement. This deal included a $400 million breakup fee, a special dividend of $2.50 per share, payable on receiving approval from Spirit shareholders, and a monthly “ticking fee” of $0.10 that took effect in January 2023. Over the past year, Spirit shareholders have already received $3.40 per share in combined special dividends and ticking fees.

I wrote the following about the regulatory landscape when discussing the deal last year:

Given below is a comparison of the top four airlines with the combination of Spirit and JetBlue, based on their fleet size, destinations, passengers carried in 2021, and total passenger revenue for the three months ended June 30, 2022.

Passenger Revenue Comparison

The combination of Spirit and JetBlue would put the company ahead of Alaska as the fifth largest U.S. airline behind American Airlines, United, Delta and Southwest. It is difficult to look at the table above and make the case for stopping this merger on competitive concerns. In fact, in terms of fleet size and destinations served, even SkyWest Airlines is bigger than the combination of Spirit and JetBlue.

With respect to the regulatory update related to the deal, I wrote the following in the October 2023 Special Situations Newsletter:

A lot has changed in recent weeks with JetBlue agreeing to wind down its Northeast Alliance with American Airlines after a federal court found that the alliance violates antitrust laws. Moreover, JetBlue agreed to divest several Spirit Airlines gates to two other ultra low-cost carriers (ULCCs) including Frontier and Allegiant. Frontier will get Spirit’s LaGuardia Airport holdings and Allegiant will get Spirit’s Newark Liberty Airport and Boston Logan Airport holdings. At the Morgan Stanley Laguna Annual Conference held on September 13, 2023, the CEO of Frontier, Barry Biffle indicated that he thinks that the merger of JetBlue and Spirit is more likely to go through and if it does, he views it as a big opportunity for Frontier.

With competition from five national airlines including American, United, Delta, Southwest, Alaska, and two ULCCs including Frontier and Allegiant, the odds appear in favor of the JetBlue and Spirit deal closing, especially given the concessions JetBlue is offering through divestitures

JetBlue’s commitment to get this deal doesn’t end with just exiting the Northeast Alliance and divestitures. The company agreed to raise the flight attendant pay next year and provide other bonuses to get support for the deal from the union representing cabin crew.

The DOJ has decided to proceed with its case against JetBlue and Spirit with the trial set to start on October 16th and expected to last four weeks. This challenge to the deal appears to be more of a political sideshow instead of a well-reasoned logical antitrust case. Given recent developments, I put the odds of the deal going through at 45%. The risk of the deal failing cannot be underestimated and the market’s odds of the deal closing are much lower than mine.

After the trial was rescheduled a few times, it finally kicked off in Boston on October 31st before Judge William Young.

During the opening statements, the defendants’ lawyers disclosed that Spirit has been actively pursuing a merger since 2016, engaging in “multiple” merger talks with carriers such as Frontier Airlines and Allegiant Air.

The DOJ argued that Spirit’s merger with JetBlue would lead to increased ticket prices and reduced competition.

At the trial’s outset, JetBlue’s stock plunged to its lowest levels in over a decade as the airline reported a larger-than-expected third-quarter loss and predicted another substantial loss for the fourth quarter.

DOJ attorney Arianna Markel contended, “JetBlue is counting on the fact that eliminating Spirit and the competition Spirit provides will allow JetBlue to raise fares. That is real harm to real people.”

Spirit attorney Jay Cohen informed U.S. District Judge William G. Young that, “Spirit lost money in 2020 … it lost more in 2021 than 2020. It planned to make money in 2022, but it lost even more money in 2022 than in 2021. It budgeted a return to profitability this year, that was the plan … the reality is that Spirit is losing money for the fourth year in a row.

The DOJ’s opening statements emphasized that the merger would negatively impact competition, potentially costing consumers approximately $1 billion annually.

Arianna Markel stated, “At its core, this case is about JetBlue eliminating Spirit, its fastest growing low-cost, low-fare competitor in the United States. With Spirit out of the way, JetBlue intends to use Spirit’s planes to make what they call a bigger turbocharged JetBlue. But bigger isn’t always better … A bigger JetBlue means fewer planes, fewer seats, and higher fares.

In response, JetBlue attorney Ryan Shores pointed out, “This is the first time the government has ever challenged, in court on antitrust grounds, a merger of two airlines this small. After this merger, JetBlue would go from about a 5% player to just over a 7% player in this country—it would still be less than half the size of the smallest Big Four airlines.

This trial marks the second attempt this year to prevent JetBlue from collaborating with another airline. Earlier, a judge ruled in favor of the DOJ, ordering JetBlue to terminate its Northeast Alliance partnership with American Airlines, which was described as a “de facto merger” of their operations in the Boston and New York regions.

While American Airlines announced its intention to appeal the judge’s decision in the Northeast Alliance case, JetBlue chose to terminate the partnership with the hope that this move would be viewed favorably by the DOJ in relation to the Spirit merger.

JetBlue has also attempted to address the DOJ’s concerns by entering into agreements to divest a portion of Spirit’s assets in the northeast to Frontier Airlines and Allegiant Air. However, the DOJ expressed that these actions were insufficient.

My assessment after the first days of the trial is that JetBlue has a stronger case and I put the probability of a deal going through at 30% to 35%. The best approach to trading this situation is through options to limit the downside. We are working on a multi-leg options trade that we hope to publish in the next few days through our new Yield Guru service.


Merger Arbitrage activity increased last week with six new deals announced and five deals completed.

Strong Merger Monday today with four new deals announced including two multi-billion REIT deals.

You can find all the active deals listed below in our Merger Arbitrage Tool (MAT) which automatically updates itself during market hours.

Merger Arbitrage

Deal Statistics:

Total Number of Deals Closed in 2023152
Total Number of Deals Not Completed in 202312
Total Number of Pending Deals
Cash Deals46
Stock Deals23
Stock & Cash Deals5
Special Conditions7
Total Number of Pending Deals81
Aggregate Deal Consideration$997.09 billion

New Merger Arbitrage Deals:

  1. The acquisition of Miromatrix Medical Inc. (MIRO) by United Therapeutics Corporation (UTHR) for $35.41 million. Under the terms of the agreement, United Therapeutics will commence a tender offer to acquire all outstanding shares of Miromatrix for $3.25 per share in cash and an additional $1.75 per share in cash upon the achievement of a clinical development milestone related to Miromatrix’s development-stage, fully-implantable manufactured kidney product known as mirokidney™ by December 31, 2025.
  2. The combination of Physicians Realty Trust (DOC) and Healthpeak Properties (PEAK) in an all stock deal. Under the terms of the agreement, each Physicians Realty Trust common share will be converted into 0.674 of a newly issued Healthpeak common share. Healthpeak and Physicians Realty Trust shareholders will own approximately 77% and 23% of the combined company, respectively.
  3. The acquisition of Spirit Realty Capital, Inc. (SRC) by Realty Income Corporation (O) for $9.3 billion in an all stock deal. Under the terms of the merger agreement, Spirit shareholders will receive 0.762 newly-issued Realty Income common shares for each Spirit common share they own.
  4. The acquisition of Eargo, Inc. (EAR) by an affiliate of Patient Square Capital for $2.55 per share in cash.
  5. The acquisition of Patriot Transportation Holding (PATI) by United Petroleum Transports for $65.9 million or $16.26 per share in cash.
  6. The combination of Six Flags Entertainment Corporation (SIX) and Cedar Fair (FUN) in an all stock merger of equals transaction, for an enterprise value of approximately $8 billion. Under the terms of the agreement, Cedar Fair unitholders will receive one share of common stock in the new combined company for each unit owned, and Six Flags shareholders will receive 0.5800 shares of common stock in the new combined company for each share owned. Following the close of the transaction, Cedar Fair unitholders will own approximately 51.2%, and Six Flags shareholders will own approximately 48.8%.

Deal Updates:

  1. On October 30, 2023, Broadcom (AVGO) and VMware (VMW) announced their expectation that Broadcom’s acquisition of VMware will close soon, but in any event prior to the expiration of their merger agreement.
  2. October 30, 2023: The European Commission has set February 14 as its deadline to review Amazon’s (AMZN) planned purchase of iRobot (IRBT). We have changed the closing date for this deal to August 5, 2024 (The extended outside date according to the Merger Agreement).
  3. October 30, 2023: According to the preliminary proxy statement filed by PCTEL, Inc. (PCTI), the company’s merger with Amphenol Corporation (APH) requires mandatory approval pursuant to the UK’s NSIA (National Security and Investment Act 2021). Amphenol Corporation intends to submit a notification seeking confirmation from the SoS (U.K. Secretary of State).
  4. October 31, 2023: LiveVox Holdings, Inc. (LVOX) and NICE filed their notifications and reports under the HSR Act on October 6, 2023. The waiting period is expected to expire on November 6, 2023. LiveVox also submitted a voluntary CFIUS filing on October 6, 2023.
  5. October 31, 2023: In a television interview with Bloomberg, Pfizer (PFE) CEO Albert Bourla reiterated that he expects the planned acquisition of Seagen (SGEN) to close before the end of the year or early next year.
  6. On November 1, 2023, EQRx, Inc. (EQRX) and Revolution Medicines (RVMD) determined the final exchange ratio in accordance with the terms of the Agreement and Plan of Merger. Under the terms of the agreement, each share of EQRx will be converted into the right to receive 0.1112 of a share of Revolution Medicines.
  7. November 1, 2023: In its preliminary proxy statement, Vericity (VERY) stated that with respect to its acquisition by iA American Holdings, the company requires approvals from the Illinois Department of Insurance and Texas Department of Insurance.

Approvals:

  1. On October 30, 2023, shareholders of Earthstone Energy (ESTEapproved the company’s merger with Permian Resources Corporation (PR).
  2. On October 30, 2023, Crestwood (CEQP) unitholders approved the previously announced transaction with Energy Transfer (ET). The Transaction is expected to close on November 3, 2023.
  3. On October 31, 2023, Denbury (DEN) announced that its stockholders voted to approve its merger with Exxon Mobil Corporation (XOM). The transaction is expected to be completed on November 2, 2023.
  4. On October 31, 2023, Tabula Rasa HealthCare (TRHC) announced that its stockholders approved the previously announced acquisition by Nautic Partners.
  5. On November 1, 2023, shareholders of PolyMet (PLMapproved the previously announced plan of arrangement with Glencore AG. The transaction is expected to be completed on November 7, 2023.
  6. On November 1, 2023, New Relic (NEWR) stockholders voted to approve the acquisition of New Relic by Francisco Partners and TPG. The transaction is expected to close on or around November 8, 2023.
  7. On November 2, 2023, Avid Technology (AVID) announced that it had received shareholder approval to be acquired by an affiliate of STG.

Hurdles:

  1. October 31, 2023: The antitrust trial challenging the merger of Spirit Airlines (SAVE) and JetBlue (JBLU) kicked off on October 31. In her opening statement, Justice Department attorney Arianna Markel told U.S. District Judge William Young that the deal would lead to fewer flights and seats and higher prices.
  2. November 1, 2023: According to Blomberg, Senate Majority Leader Chuck Schumer is urging the US Federal Trade Commission to look into whether Exxon Mobil (XOM) and Chevron Corp.’s  (CVX) proposed oil and gas acquisitions could violate antitrust laws.
  3. November 1, 2023: A pension fund sued New Relic (NEWR) over fears that its planned sale to Francisco Partners Management and TPG Global was driven by pressure from activist hedge fund JANA Partners.
  4. On November 1, 2023, Rithm Capital’s (RITM) plan to acquire Sculptor Capital Management (SCUhit another hurdle when four former executives sued the hedge fund firm, alleging the transaction would wipe out about $30 million of stock they own. The ex-Sculptor executives asked a New York State Supreme Court judge to postpone a November 16 shareholder vote on the deal until their case is resolved. The complaint follows a separate legal challenge pending in Delaware Chancery Court.
  5. November 2, 2023: Land & Buildings Investment Management, a shareholder of Six Flags Entertainment Corporation (SIXissued the following comment on the company’s proposed merger with Cedar Fair (FUN). “The proposed merger of Six Flags and Cedar Fair does not maximize value for all shareholders and there are better alternatives available.” Lan
  6. November 3, 2023:  According to Reuters, Wildcat Capital Management, a top shareholder in Consolidated Communications Holdings, Inc. (CNSLplans to vote against its $3.1 billion takeover by an investor consortium, as it undervalues the broadband services provider.

Shareholders Meeting Schedule

  1. On October 30, 2023, Timber Pharmaceuticals (TMBRreconvened and adjourned the Special Meeting of Shareholders to November  17, 2023.

Closed Deals:

  1. The acquisition of Fiesta Restaurant Group (FRGI) by Authentic Restaurant Brands was completed on October 30, 2023. It took 84 days for this deal to be completed.
  2. The acquisition of Earthstone Energy (ESTE) by Permian Resources Corporation (PR) was completed on November 1, 2023. It took 72 days for this deal to be completed.
  3. The acquisition of Denbury (DEN) by Exxon Mobil Corporation (XOM) was completed on November 2, 2023. It took 112 days for this deal to be completed.
  4. The acquisition of Crestwood Equity Partners (CEQP) by Energy Transfer (ET) was completed on November 3, 2023. It took 79 days for this deal to be completed.
  5. The acquisition of Tabula Rasa HealthCare (TRHC) by ExactCare Pharmacy was completed on November 3, 2023. It took 88 days for this deal to be completed.

Weekly Spread Changes:

The table below shows weekly spread changes between October 27, 2023, and November 3, 2023.

SymbolQuoteAcquiring
Company
Acquiring
Company Quote
Current
Spread
Last Week
Spread
Spread Change
Weekly
Deal
Type
SAVE11.26JetBlue Airways Corporation (JBLU)4.395175.31%111.03%64.28%All Cash
TMBR2.51LEO US Holding, Inc. (N/A)4.38%-3.68%8.06%Special Conditions
IRBT32.38Amazon (AMZN)138.5459.82%54.25%5.57%All Cash
CWBC13.03Central Valley Community Bancorp (CVCY)16.630.83%-3.77%4.60%All Stock
GPP13.825Green Plains Inc. (GPRE)28.19-2.95%-6.15%3.20%Cash Plus Stock
PACW8.245Banc of California, Inc. (BANC)12.721.34%4.91%-3.57%All Stock
SP51.47Metropolis Technologies, Inc. (N/A)4.92%8.61%-3.69%All Cash
NGMS26.66Aristocrat Leisure Limited (ALL.AX)39.3210.65%15.85%-5.20%All Cash
CNSL4.25Searchlight Capital Partners and British Columbia Investment Management Corporation (N/A)10.59%15.91%-5.32%All Cash
AMTI0.165Cyclo Therapeutics, Inc. (CYTH)1.0258.09%17.55%-9.46%All Stock

Top 10 Merger Arbitrage Deals With The Largest Spreads:

Please do your own due diligence on deals with large spreads. Some of these large spreads might be related to regulatory issues or because of the way the deal is structured. We classify some of these deals as “special situation” deals in our merger arbitrage tool and provide additional details to help with the analysis. There may be unique situations related to special dividends, spinoffs, proration, etc. that need to be accounted for when looking at these spreads.

SymbolAnnounced
Date
Acquiring
Company
Closing
Price
Last
Price
Closing
Date
ProfitAnnualized
Profit
SAVE07/28/2022JetBlue Airways Corporation (JBLU)$31.00$11.2606/30/2024175.31%268.86%
MIXT10/10/2023PowerFleet, Inc. (PWFL)$7.94$4.9103/31/202461.61%152.98%
IRBT08/05/2022Amazon (AMZN)$51.75$32.3808/05/202459.82%79.69%
ACI10/14/2022The Kroger Co. (KR)$27.25$21.9503/31/202424.15%59.95%
PNM10/21/2020Avangrid, Inc. (AGR)$50.30$42.412/31/202318.63%121.44%
GTH10/11/2023New Genetron Holding Limited and Genetron New Co Limited (N/A)$4.03$3.503/31/202415.14%37.60%
CPRI08/10/2023Tapestry, Inc. (TPR)$57.00$51.0506/30/202411.66%17.87%
NGMS05/14/2023Aristocrat Leisure Limited (ALL.AX)$29.50$26.6605/14/202410.65%20.36%
CNSL10/16/2023Searchlight Capital Partners and British Columbia Investment Management Corporation (N/A)$4.70$4.250001/15/202510.59%8.84%
AMED06/26/2023UnitedHealth Group Incorporated (UNH)$101.00$91.8212/31/202310.00%65.16%

Deals In The Works

Four new potential Merger Arbitrage deals were added to the ‘Deals In The Works‘ section last week.

  1. October 30, 2023: According to Bloomberg, Zynex (ZYXI) has initiated a process to review potential strategic alternatives that could include a sale.
  2. October 31, 2023: According to Bloomberg, Cytokinetics (CYTK), a late-stage biotech firm developing cardiovascular treatments, is exploring options after receiving takeover interest.
  3. October 31, 2023: According to Bloomberg, Velo3D Inc., (VLD) a metal 3D printing technology company, is exploring strategic options including a potential sale.
  4. November 1, 2023: According to WSJ, Six Flags (SIX) is nearing a deal to merge with Cedar Fair Entertainment (FUN), a move that would combine two of the largest regional theme-park chains in the U.S. This potential deal was confirmed on November 2, 2023.

Updates:

  1. Hollysys Automation Technologies (HOLI) disclosed that it has received several indications of interest from buyers.
  2. According to Reuters, automakers oppose Cleveland-Cliffs (CLF) push to buy U.S. Steel (X).
  3. US Steel (X) auction to near end with site visits next week. Possible bidders in the final round include Cleveland-Cliffs (CLF), ArcelorMittal SA (MT), and Stelco Holdings.

SPAC Arbitrage

Business Combination

  1. On November 3, 2023, Concord Acquisition Corp III (CNDB) entered into a definitive business combination agreement with GCT Semiconductor, Inc.

Completed

  1. On October 31, 2023, American Acquisition Opportunity (AMAO) announced that it closed its previously announced acquisition of Royalty Management.
  2. On November 2, 2023, Forbion European Acquisition Corp. (FRBN) and enGene, Inc. (ENGNannounced the completion of their previously announced business combination.
  3. On November 3, 2023, Twin Ridge Capital Acquisition Corp. (TRCA) and  Carbon Revolution Limited (CREVcompleted their business combination.
  4. On November 3, 2023, Abri SPAC I (ASPA) and Collective Audience, Inc. (CAUDcompleted their business combination.

Terminated

  1. On October 30, 2023, Artemis (ARTE) and Danam Health, Inc. mutually agreed to terminate the Agreement and Plan of Merger.
  2. On October 31, 2023, Ares Acquisition Corporation (AAC) and X Energy Reactor Company mutually agreed to terminate their business combination agreement.
  3. On October 31, 2023, Industrial Tech Acquisitions II, Inc. (ITAQ) and NEXT Renewable Fuels mutually agreed to terminate their previously announced Agreement and Plan of Merger.
  4. On November 1, 2023, International Media Acquisition Corp. (IMAQterminated its merger agreement with Risee Entertainment and Reliance Studios.
  5. On November 3, 2023, Healthwell Acquisition Corp. I (HWEL) announced that its previously announced Business Combination Agreement with Starton Therapeutics, Inc. was terminated.

List of all pending Merger Arbitrage deals:

Disclaimer: I hold a long position in Spirit Airlines (SAVE). Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.