Market Overview

Doing The Math On A Potential Spirit-Frontier Merger

Share:
Doing The Math On A Potential Spirit-Frontier Merger
Related SAVE
Potential Losers If Trump Terminates U.S.-Cuba Relations
Airlines Have More Room To Run

Stifel clients seem to believe that a Spirit Airlines Incorporated (NASDAQ: 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.

Related Link: Alibaba Has Gone On A Buying Spree Since Taking Groupon Stake

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.

Latest Ratings for SAVE

DateFirmActionFromTo
Nov 2016CitigroupDowngradesBuyNeutral
Sep 2016Imperial CapitalInitiates Coverage onOutperform
Aug 2016CitigroupMaintainsBuy

View More Analyst Ratings for SAVE
View the Latest Analyst Ratings

Posted-In: Analyst Color Long Ideas News Rumors M&A Top Stories Analyst Ratings Trading Ideas Best of Benzinga

 

Related Articles (SAVE)

View Comments and Join the Discussion!