Yesterday, the Department of Justice announced that it filed a lawsuit seeking to block JetBlue’s proposed acquisition of Spirit Airlines. While the DOJ and Federal Trade Commission have pursued novel theories of liability in some of their merger litigation, this excerpt from the DOJ’s press release suggests that the theory here is fairly straightforward and focuses on the deal’s alleged impact on consumers:
The complaint, which seeks to block the acquisition under Section 7 of the Clayton Act, alleges Spirit has been a particularly disruptive force, growing rapidly, introducing innovative products, and allowing customers to choose which services to purchase, all while charging customers very low fares.
Spirit has forced larger airlines, particularly the already-low-cost JetBlue, to compete for customers by introducing unbundled, customizable ticket options and lowering their own fares, allowing more Americans to travel. If the acquisition is allowed to proceed, prices would increase on routes where the two airlines currently compete. This is particularly the case on the over 40 direct routes where the two companies’ combined market shares are so high that the deal is presumptively anticompetitive.
As further alleged in the complaint, in the last 10 years, Spirit has doubled its network in size and, before this deal, expected to continue expanding at a quick pace. The acquisition stops this future competition before it starts.
The acquisition would also make it easier for the remaining airlines to coordinate to charge travelers higher fares or limit capacity. JetBlue has already partnered with American Airlines, the largest airline in the world, through the Northeast Alliance, which the Department sued to block. Now, JetBlue is doubling down on consolidation, seeking to acquire and eliminate its main ultra-low-cost competitor, depriving travelers of yet another choice.
The DOJ contends that if JetBlue acquired Spirit, it would likely increase prices on every current Spirit route, which would result in travelers either having to pay more for amenities they don’t want or put them in a position where they can’t afford to travel at all.
The DOJ’s action can’t come as a surprise to either of the parties to the deal. Spirit made much of the antitrust risks of a deal with JetBlue when it opposed JetBlue’s ultimately successful efforts to “deal jump” its proposed merger with Frontier. Page 13 of the DOJ’s complaint highlights those concerns by including a slide from Spirit’s presentation opposing JetBlue’s hostile tender offer that details the deal’s potential antitrust problems.
Yesterday, I blogged about antitrust risk allocation provisions contained in merger agreements, so it’s probably worth mentioning how the parties addressed them here. The relevant antitrust covenant in this deal is contained in Section 5.5 of the merger agreement. While Section 5.5 requires the parties to use their reasonable best efforts to obtain required approvals, JetBlue isn’t required to make any divestitures that would reasonably be expected to result in a MAE. According to JetBlue’s 8-K filing announcing the deal, it’s also not required to agree to any divestitures that, in JetBlue’s discretion, would be reasonably likely to materially and adversely affect the anticipated benefits of its alliance with American Airlines — an arrangement which, as noted above, the DOJ is also challenging.
However, Section 5.18 of the agreement obligates JetBlue to pay a 10 cents per share monthly ticking fee to Spirit’s stockholders beginning after stockholder approval of the merger has been obtained and ending when the deal closes or is terminated. The ticking fee is characterized as a prepayment and will be credited against the amount payable to stockholders at closing.
In the event that the deal is terminated because of the inability to obtain required regulatory approvals, then in certain circumstances JetBlue will be obligated under Section 7.2 of the agreement to pay directly to Spirit’s stockholders a reverse termination fee of up to $400 million, with an additional $70 million payable to Spirit itself. Those reverse termination fees add up to a hefty 12.4% of the deal’s $3.8 billion value.
– John Jenkins, DealLawyers.com, March 8, 2023