Catch the Spirit?

Liquidation? Retry M&A? Restructure and walk alone? There are many paths available that do not wipe out shareholders.

Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.

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This week, a court ruling stopped the merger between Spirit and JetBlue which sent shockwaves through some parts of the investor community. As of this writing, Spirit stock is down more than 60% without finding a floor so far. With a huge debt burden and mounting operating losses, Spirit seems to be running out of options in the eyes of many observers. Some even talk about filing for bankruptcy already.

In this article, I will investigate whether this presents an opportunity to Catch the Spirit.

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TLDR Summary

• The bear case is clear. Without a credible path back to profitability, Spirit will struggle to refinance $1.8bn of debt over the next 2 years. This might require a liquidation or a balance sheet restructuring that may wipe out shareholders. I believe such speculation is way too early. The company has quite a few levers to pull and odds favor that markets will entertain some of those ideas when the dust settles.

• If they chose to liquidate, the proceeds would likely exceed the current market value of the equity which is only half of its book value. Most balance sheet items are tangible and presumably easy to monetize. There might be some impairment in the equipment, but the market for aircraft is tight. Also, the company has a ton of off balance sheet assets to monetize, such as its airport concessions for example.

• If they retried M&A with JetBlue or another partner, they could generate enormous synergies worth multiples of their current market cap. An acquirer would likely compensate Spirit’s shareholders for some of that. The involved parties could work around regulatory scrutiny by making more divestment concessions. Even if a new bid comes in lower than $34, it won’t be zero. It can’t be both true at the same time that JetBlue wants to get Spirit’s equity at seemingly any cost and that nobody else would bid anything.

• Management could also restructure operations and go it alone again. The ULCC model was very successful up until 2020 and some of the recent issues may be more cyclical than structural in nature. There are successful ULCC players to prove the concept. Growth pain can be healed by shrinking back to more sustainable levels and refocusing on what actually works. Bridge financing is available from the companies owned equipment.

• Some of the recent bankruptcy speculation is likely ignited by management itself in an attempt to appease the judge. If M&A fantasy dies, management can refocus on operations and potentially surprise to the upside.

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Industry Background