By Rajesh Kumar Singh and Shivansh Tiwary
(Reuters) -JetBlue Airways on Friday raised doubts about the future of its $3.8 billion merger deal with Spirit Airlines (NYSE:SAVE), saying it might be unable to meet certain conditions required as part of the agreement for unspecified reasons.
As a result, JetBlue said it had informed Spirit that the merger agreement might be terminated as early as Sunday.
Shares of Spirit were down 9.5% at $6.54 on Friday afternoon, adding to their losses of about 55% this month which were sparked by a U.S. judge's move to block the deal. JetBlue's shares were up 3.5% at $5.53.
JetBlue said it continues to evaluate options under the agreement and, unless the agreement is terminated, it would abide by its merger obligations. The New York-based airline could not immediately be reached for comment.
In response, Spirit said there was no basis for terminating the merger agreement. It said it would continue to abide by its obligations and was expecting JetBlue to do the same.
Without the JetBlue deal, Spirit faces a rough road ahead as the ultra-low-cost carrier has grappled with weak demand in its key markets as it seeks to return to sustainable profitability. Some analysts have even suggested the company could face bankruptcy if it cannot shore up finances.
Spirit has said it is assessing options to refinance its 2025 debt maturities, and is not pursuing or involved in a statutory restructuring.
Last week, the company said the amount of compensation it expects to receive from supplier Pratt & Whitney over several jets that were grounded would be a significant source of liquidity over the next couple of years.
Earlier this month, a U.S. judge blocked the airline's planned merger with JetBlue, after finding that the proposed deal could threaten competition in the U.S. aviation market and harm ticket prices. Both airlines have said they will appeal the ruling.
Under the merger agreement, Jan. 28 is the deadline for the deal's closure. If regulatory approval has not arrived by that date, there is an automatic provision to extend the deadline until July 24, 2024. Regulators have yet to approve the deal as of Friday.
JetBlue's move is aimed at either forcing a termination of the deal or restructuring it at a new purchase price, said Steve Segal, M&A attorney at business law firm Buchalter.
Segal said mounting concerns about Spirit's finances and its future might be deemed to constitute a "material adverse effect," offering JetBlue a legal argument to call off the deal without triggering the July extension.
JetBlue is mindful that Spirit's business has deteriorated significantly since the two agreed on the tie-up in July 2022, sources have told Reuters.
If the appeals court reaffirms the lower court's ruling, "JetBlue shareholders could breathe a sigh of relief that the carrier would not have to assume Spirit Airlines' high debt load or its cash-burning operations," Citi analyst Stephen Trent wrote in a note. Trent said there is a probability of only 2% that the appeal will succeed.
When Spirit originally accepted JetBlue's acquisition offer, the market value of its equity was $3.8 billion. Its enterprise value, inclusive of its outstanding debt at the time, was $7.6 billion. Since then, the company's market capitalization has fallen to about $788 million.
If JetBlue is able to complete the transaction with new debt to fund the original transaction, its debt-to-EBITDA ratio will increase to 12 times or more at the end this year, up from 9 times at the end of 2023, Moody's (NYSE:MCO) investor service said this week.
JetBlue's annual interest burden will also increase to about $620 million from about $375 million in 2023, Moody's said.
After the judge blocked the proposed merger earlier this month, JPMorgan analysts said, "JetBlue dodges a bullet."
"It frees JetBlue from a costly merger we believe management and the Board were no longer wed to," they said.
JetBlue's earnings are also under pressure. On Friday, the company said it is looking to cut fixed costs by offering buyouts to employees in corporate, airports, and customer support functions. The program does not include pilots, flight attendants and technicians.