Doing The Math On A Spirit-Frontier Merger

Stifel investors seem to believe that a Spirit Airlines Incorporated SAVE buyout of Frontier Airlines is inevitable. However, analyst Joseph DeNardi doesn’t see a deal as cut and dry.

According to DeNardi, while Spirit is likely very interested in a buyout, its hands are somewhat tied at the moment. If Spirit chooses to do the estimated $2.5 billion deal with debt, it would result in an estimated post-deal leverage of 4x adjusted net debt to EBITDAR. That’s an uncomfortable amount of leverage for an airline.

However, going the equity route is also not particularly appealing at Spirit’s current valuation.

“If Spirit wants to use equity, we suspect it will wait until its multiple recovers,” DeNardi explains.

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Ultimately, Stifel does believe the buyout will happen, but maybe not as quickly as the market anticipates.

DeNardi admits that the benefits of a combined network and the presence of former Spirit leadership at Frontier all point to a buyout.

In terms of business, he points out that both Spirit and Frontier average around $0.105 of RASM, but Spirit consistently outperforms Frontier when it comes to CASM.

DeNardi also acknowledges that there could be synergistic benefits to the deal, but there will also likely be “dis-synergies,” including a potential re-pricing of Frontier’s pilot contracts.

Disclosure: the author holds no position in the stocks mentioned.